Onto Innovation Inc. Stock

[Audio Gap] everyone. Welcome to Day 2 of Citi Global TMT Conference. My name is Elizabeth Sun. I'm here in Citi's research covering semi and semicap team. It's my pleasure to welcome the Onto team here. We have the CEO, Mike Plisinski and then we have the CFO, Brian Roberts. Welcome both.

Thank you.

So let's start with market overview. Mike, when we were here last year at this time, the WFE outlook was more, say, uncertain, maybe slight growth. And there were some -- or a lot of investor concerns about some share dynamics at that time. Today, the WFE cycle looks considerably stronger and Onto I think is growing faster than the market. So if we start at a high level, what has changed over the past year, both in the breadth and durability of the WFE cycle and also some of the share dynamics for Onto?

So I think a few things. First, the markets for sure have been strong. Customers are confident. They're spending money. They're giving us better visibility. They're sharing multiyear expansion plans with us. So that's good. And then behind that, we had several new products. The Dragonfly G5 came out and really did an outstanding job in the beginning of the year, gave customers confidence in the ongoing technology portfolio that we have for inspection, which help them drive or basically give us more share.

In addition, we had the Atlas G6 come out also around the same time and the adoption for Atlas -- the adoption for new Atlas products typically is relatively long as customers take a lot of time to make sure that the matching is there between the Atlas V and the process control is in line, but the adoption was very, very fast with the Atlas G6. And in some cases, we saw customers just go straight to purchase orders and ramp right on the Atlas G6. So that tells me that there was some compelling value from the Atlas G6 that our competitors couldn't deliver. And so I think that also helped.

Yes. Just to double click on that piece. I hate to ask this, but like I'm curious, have you gained all of the share back?

What share? I don't know what you're talking about.

Making -- there's more to go on the share gains part.

It's hard to say because the particular customer you might be talking about, which I don't recall, is didn't spend a ton, right? So they didn't -- they've been factory constrained. They're trying to leverage OSATs to sort of free up some capacity and we got huge OSAT orders. So that should tell you one thing. But back in -- what it was March or whatever it was, we did say that we were qualified for all. So we'll see where the actual allocations end up when they start spending more aggressively in '27. But the initial feedback has been super positive. Already the competitors reacting and trying to fight back. We already have our solutions. So I think -- it's the normal dynamics we're back to the normal games we play.

But I would say as far as did we gain it all back for sure, we're capable for everything that happened. How much the customer wants to allocate back and forth, we'll see. Generally, that customer cares more about total spend with a particular supplier versus second source on a per layer basis. So we're optimistic that we should see essentially things coming back.

Sounds good. And you talk about backlog, more than $1 billion, and 60% to 70% is scheduled for '26 and your Q3 guide implies mid-teens sequential growth. And Q4, I think assumes kind of mid-single-digit growth. So does this strong backlog create any upside to either like Q3 or Q4? Or is it like conversion pace coming for like -- more like supply facility readiness or installation timing?

Yes. I think our focus is more on driving the additional backlog for 2027. I think the growth we've implied is around 40%, significantly above our peer -- nearly double our peers, frankly. And of course, that kind of growth can stress supply chain. So we're more focused on, all right. Let's maintain that growth. Let's make sure that our supply chains ramp effectively, quality is maintained or improved, et cetera and that we're preparing ourselves for an even better 2027. So our focus is a little bit less on trying to drive a lot more upside there versus manage through and prepare for even better 2027.

And what kind of growth are you preparing for 2027? Are you expecting a kind of acceleration? Or compared to the market growth better than continue this kind of outperformance?

We would -- though we're not correlated to WFE, we think the drivers we have in place, for instance, the Dragonfly G5 opening up front end, potentially front-end markets, the Atlas G6, which is in the early stages of adoption and bigger expansions expected next year in logic, the silicon photonics opportunity, which we -- if you add all those up, we would expect we would be able to outperform the market. But again, we're not correlated and it depends on where the market is.

No, that makes sense. And for the backlog...

Maybe share more at the Analyst Day.

I'm hoping you can share more -- a little bit more today. So for that backlog, how concentrated is that by customer or by products? Or is it very broad-based?

It's fairly broad-based by end markets, but it's the bulk of it is tied to our core products, the OCD metrology, the inspection. Of course, we have some litho in there, and we've got some of the other products, all throughout, but the core is there. But it's fairly broad-based across the segments we serve.

And if you look at growth by segment, what are the biggest growth area you are expecting going to next year?

So this year, the biggest growth was in packaging, 80% growth. The advance nodes is about 35% growth. We would expect similar -- not those numbers, but similar dynamics where advanced nodes, advanced packaging will still probably grow stronger than advanced nodes, but we expect both to grow fairly well.

Understood. And advanced packaging you are growing 80% this year. So it's more -- is it more in the HBM memory side or more on the 2.5D logic side?

Fairly well split. I mean, every quarter is a little different, but we're generally around this 50-50 mark, 60-40, depending on the quarter, memory or logic being the leader there. So I would say -- and that makes sense because they're kind of tied. The logic requires the memory around it. So as that grows, the whole packaging requirements grow across both. So I'd say that's the dynamic we're seeing. Of course, logic is getting more competitive. So -- and there are some constraints in the logic packaging space. So we're seeing end customers, the hyper chip designers, the AI device designers looking at alternatives and expanding like the panel packaging and leveraging other technologies to try and drive performance, and that's creating new opportunities for us, too.

I'll touch base on panel level packaging a bit later. But -- and just between memory and logic, is there any like one area over the other, you are seeing more share gain opportunities? Or is it also very balanced?

So for memory, we've always had very high share and that we maintained. So share gain is really tied to 3D metrology. So the bump metrology. There, if you hear more about smaller denser bumps, that creates more opportunities for our 3DI technology. In the heterogeneous -- in the logic packaging, there, we have some opportunities to gain share because of the very high resolution that the Dragonfly G5 provides.

Understood. And you said you received more than $200 million of Dragonfly orders from just one single OSAT, so mostly for delivery for next year. So does that signal a broader structural increase in process control intensity in OSATs? Or is kind of this specific to the customer capacity expansion specifically?

That's a good question. I think the OSAT -- so as the industry is constrained on the heterogeneous packaging, and there's 2 things happening. One, end customers are looking for alternative technologies for packaging. EMIB is one everyone talks about, but there's others. The other dynamic is, in this case, TSMC, it's well publicized. TSMC is looking at how to release more capacity, the fab constraints. So what do you do? You take your lower-end process steps you outsource those to the OSAT, so you can free up your precious fab capacity for your higher end. And so that dynamic we saw in play.

And so I'd say the OSATs from a capital intensity perspective, it's really volume driving these huge orders and it's volume I expect going to be from both the outsourcing of capacity as well as the capacity that they're going to be selling from their own technology.

Got it. And what is Onto's share position on the OSAT versus the foundry players?

Generally, on the higher-end applications, so not super cheap stuff like, I don't know, analog device or something like this. Then the -- we have very high share on the 2D side. We've gained some really nice traction on 3D, at least a couple of the OSATs so on 3D bump metrology. So pretty high share on the high end, if it's low end or if it's China, of course, then we have less.

Got it. And I want to ask on Dragonfly G5, it was just launched, I think, this year, and you talk about qualified at leading both memory and logic customers, I think. So you have said it will be a relatively small portion for '26 revenue. But how quickly do you expect customers to transition from -- transit from maybe G3 to Gen 5 in next year?

So the key there is that I don't expect so much of a transition. Maybe originally we thought maybe that could happen. But what we're seeing is customers still appreciate the G3 for its lower price point, okay? But if they have applications that don't require the high-end 2D and it's mainly some of our clarifying capability or subsurface inspection or something like this, then that platform, the G5 platform gives them no added benefit. So they can stay on the G3 platform. If they also -- or 3DI can also perform the same on both platforms. So those are the primary applications, G3 continues. If it's really tied to 2D and those applications are extra, then the Dragonfly G5 will be the choice. The real focus for G5, though, was expanding into new markets. So it really wasn't about, all right, G3 and a transition, everyone is going to migrate to this higher-margin tool or whatever. It's really about growing into new markets because the G3 has been growing phenomenally throughout '26. So that demand is still high. Our focus with the G5 is high-resolution new applications in packaging, which we've already demonstrated and proven, but now the front end. And that's the focus for 2027. So 2027, sorry, because I did a long way of not answering your question. So I would expect much more growth in '27 for the G5, but tied to new applications versus a transition from G3 to G5.

Got it. And maybe it's just me not super familiar with the tools, what kind of new applications does G5 open up for you?

High resolution, okay? So 100-nanometer type applications inspection in the front end. So that's one. But we mentioned there are several others also in specialty devices, again, front end, but different applications in, let's say, advanced nodes, again, high resolution. And we didn't really give a lot of detail, but what we said was we had about 10 customers, I think a quarter ago, 10 customers across 15 different applications. And we would expect, based on the feedback and how the valuations are going, that the majority of those will convert to orders throughout 2027.

Understood. And maybe a quick one for Brian, and 2.5 is margin accretive?

Yes, absolutely. It's got a better ASP and a better margin profile for us.

Got it. And I do want to ask about silicon photonics. Is that more than $500 million silicon photonic SAMs you see by 2030? How should we think about the opportunity split between inspection and metrology?

I think inspection is going to be the largest opportunity. By nature, it's almost always going to be the largest opportunity. But we are seeing metrology penetration. We are selling metrology tools. We also think there's going to be opportunities for some of our other tools in the space. So yes -- so when we come up with that SAM inspection will be, for sure, the highest opportunity. And that's reflected in the backlog we have now. The bulk is inspection, but also multiple customers adopting a couple of different metrology tools.

Got it. And there is a wide range of expectations on silicon photonics or CPO. Just curious to your $500 million number, what drives the upside or downside to that number?

I think the -- it's how quickly the technologies adopted at the server and then at the rack level between those 2. We're playing in both. So it's really -- I don't even think it's a question about if it happens. From what I've heard and what I've listened to in other executive forums from the NVIDIAs, Broadcoms, AMDs, et cetera, they're committed to driving this forward. I think the hyperscalers are committed to it from a data center perspective. So it's just a matter of how quickly it gets adopted and ramped, the economics and the performance benefits are seeing everyone is convinced on that. So that would be the upside, downside or timing.

Understood. And if we stay in the specialty devices, I think silicon photonics is in part of that. But outside that, it has improved throughout the year. You are talking about photonics and also like power and silicon carbide demand beginning to show some signs of recovery. So how big is -- how big is data center power for Onto right now relatively to the -- traditionally, I was assuming it's more about auto and industrial power.

Yes. I think data center power is relatively small. But from the customers -- remember, we had a good run with the power semi. And then EV -- and even as EVs were slowing down, we were still growing quite nicely. And that was tied to driving yield improvements for those customers. We -- and then the expansions kind of slowed and their investment in the yield improvement. But -- now we're hearing from them that things are picking up and we need to prepare for this because of the data center power. So we're not seeing the actual orders. I don't have a good clarity on timing. But if they're already talking to us, I would say, 2027 into 2028, would be what they are thinking about.

So it could be kind of another leg of growth driver going into the next couple of years?

Yes. I don't know how big the magnitude of it yet, but it should definitely be -- and it would be captured under our specialty devices. But it will be -- yes, we'll see. I mean, silicon power was pretty -- was on a tear for a while there. If the data centers and how big these data centers are that are being announced, could take quite a -- quite a bit of chips.

Yes. Understood. And on the panel-level packaging, we're getting here. So it does receive a lot of industry attention, but adoption still appears to be relatively early. Where do you think the industry is right now for panel-level packaging?

I think it's an interesting market. So for enterprise servers, the adoption for advanced IC substrates was already very clear and the 2 big guys, Intel and AMD during the COVID explosions, they talked about being constrained by advanced IC substrates. And that's an area that the JetStep X500 and our Firefly play in. But then there was overcapacity, everything fell out, the whole story there. That has slowly come back and worked itself through. But now we're seeing the constraints in AI packaging or heterogeneous packaging, drive customers to look at panel packaging as an alternative. We also see as the adoption of heterogeneous packaging is kind of clear now. That's happening. Die are going to get bigger. I mean packages are going to get bigger.

The economies of scale at the wafer level, just aren't going to work at the 310x310, they get better, but compared to 600x600 or 510x515, still much smaller. So these customers are looking at, all right, where can we drive some of this capacity to these other companies that have a mature process or, let's say, a proven process and can ramp right now. And that's what we're seeing in our business when we talked about it doubling and then growing again into 2027, that's now the accelerant we see. So it's -- and that part of the adoption you're right, is early, and I think that's going to continue over the next several years.

Understood. And you talked about you are addressing this panel-level packaging market in 3 ways, like all the 3 lines of products. So it could be a little bit early, but how should we think about the size of the opportunity in the next few years?

I forget what we've said publicly. I think we said it can be around $1 billion SAM, and our competitors have said even more. For us, that's going to include process -- basically inspection as well as the lithography. We're not going to get 100% of that SAM, they're our competitors. So could it be $200 million, $300 million? That would be a reasonable expectation over the next few years.

Understood. I'm going to take a pause here to see if any questions in the audience.

Do you see any headwinds at all to process control intensity going forward? Or is it pretty much up and to the right from here?

Up into the right forever. In the near future, I don't see any headwinds. Demands are high. The industry is just driven by innovation, which drives complexity, which needs more process control. So I don't see any headwind other than when do things slow down. That's just a general industry comment. But as far as specific to process control, generally, it increases with the increase in complexity, and I don't think anyone believes that the semiconductor industry is going to get simpler in the future, it just always gets more complex. So process control intensity should always continue to increase.

Yes. Actually, you're running the show, sorry.

Go ahead.

[indiscernible]

Sorry, there was one on the mic there. I'm sorry.

Sorry. If you could just elaborate a little bit. You drew some parallels between the data center cycle that we're running right now and the EV cycle as it relates to your business and maybe just can you elaborate on that a little bit and kind of where we are in those separate cycles and how they're so different and what the rate is to your business would be helpful.

So over the last several years, we saw really significant growth in the adoption of our process control, primarily inspection but also metrology for supporting our semiconductors and that wasn't driven because the market was going down. Capacity overall was coming down. So it wasn't driven by expansions from those customers. It was driven by the need to improved yield. Yields were in the 60, 70 range, not in the 90s like you typically expect. So they really used our tools to drive that yield improvement with the expectation they can drive higher output, right? So with higher -- but -- that recovery for the EVs hasn't really happened yet. But what customers are telling us now, those same customers is they're seeing demand from the data centers that's going to drive adoption of these power semiconductors. And so hopefully, that means another growth driver for them. And as they expand, they've already inserted our process control in the process, so we should benefit from that.

So can you just say more about your partnership with [ Rigaku ], I know you guys initiated a 27% stake. I think transactions have closed second time this year. Maybe just talk about that partnership and also the appetite by the entire company and just...

So we won't -- first, it's closed. So that's done deal. But we won't talk about appetite for what the future steps could be. Obviously, our history is not to make partial investments in companies, but we're not going to talk about what the next steps would be. That said, the partnership was strategic in that for us looking forward, and actually, this is a misunderstanding. So some investors thought this was because we saw OCD eventually running out of steam and x-ray becoming, let's say, the next step or the next thing. That's not what we see.

What we're seeing is OCD, at least for us, we can continue to push OCD and serve the market for the foreseeable future. But as the world goes to more 3D, 3D transistors or 3D stacking of die or wafers, there are elements of the process between these layers that customers are interested in that optical can't solve. So x-ray is a potential solution, a potential way to see through these layers and provide information to the customers.

Also our acoustics, our acoustic metrology, sound wave metrology is a very unique capability for that in the metal space. But it has limitations. And so the partnership with Rigaku, we've started with 2 different customers. We went up against the leading player in x-ray, and we beat them at both customers. So the combination of our AI defract, our strong modeling engine, which is used in optical also and the very strong sensor capability, our x-ray capability from Rigaku makes a real compelling value proposition. That's one.

The next is kind of this idea of a hybrid metrology. So the idea that the speed of optical and the precision from x-ray, but it's much slower, can combine to provide a more compelling value proposition for our customers. And the combination is made much simpler because the AI defract our software is aggregating all these data streams we're already modeling. So now we can model the aggregate instead of just one or the other. We'll see what I'm saying. So we get more information in the models. So that's another advantage to this partnership.

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Co-exist, right? So -- so, so far, we can push optical metrology to the extent that the road maps are that we see with our customers. So we're working with them on nodes that you're not aware of. So we're pushing the technology. As long as optical can make the measurement, it's the fastest way and the cheapest way to make the measurement. Customers will always choose optical. So that's one.

But the limitation of opticals, it can't see through thick layers of metal materials, et cetera. So there's gaps as the world goes more 3D. Now when it was a planar world, didn't matter, things got smaller and thinner and optical could see through. As things get stacked and they get thicker, then we need a new technology. We have acoustic metrology for part, but it's not a full solution. The x-ray can be a complementary solution in a world of 3D.

We have a few minutes left. I do want to ask about gross margin. So Q2, I think you did 57%, you talk about incremental 50 bps in the next couple of quarters. I guess, going forward, how much further can gross margin go? And is pricing in -- is a consideration in that?

So '26 has really benefited from the move to the extended factories. So all of the margin really that we've driven to date as well as what we expect to drive here in the second half of '26 has driven early operational productivity and efficiency. And that is the move of manufacturing from the U.S. over to these international factories over the course of the year. And we talked earlier that. A year ago this time, we were shipping our first tools from our international factories. And in Q2, we shipped about 70% of our tools, just a meteoric rise up the curve there. As we move into '27, certainly, the benefits of the Dragonfly G5, right, having that highly accretive margin profile, some of these other products, Mike mentioned, the Atlas G6 is another, will give us some ASP lift, which will help us to continue alongside productivity, drive towards a margin that starts with a [ 6% ].

So that's certainly still what we believe is that we can have a margin -- a gross margin profile that will start with [ 6% ]. That then is dropping through at a higher rate to our operating margin. To date, we've driven 250 bps of gross margin. We've doubled that at the operating margin line. And with the growth in the business, it's allowing us to continue to invest in R&D and become more operationally efficient, but also then continue to drive more to the bottom line. So hopefully, we'll continue to see that operating margin expand at a faster rate than what our gross margin has been driving towards.

Is there any possibilities to reprice some of the existing products except from the new products are getting higher pricing and I get that point, but like for existing product portfolios.

Yes, certainly, I mean, it's not lost on anybody that the 2 major headwinds in '26 have really been focused around memory costs and probably freight, fuel, right, fuel shortage. So we've tried to help offset some of the fuel shortage by again being in region. That's been a helper for us. But as we go into kind of the '27 pricing season, if you will, budgeting season, certainly, some of those conversations are ongoing with customers around the existing product portfolio, too.

Got it. And to that point, people ask -- in this market is good. People ask about capacities, both Onto's perspective and also the supply chain perspective. So are you -- first of all, are you supply constraint? And second, do you see any supply bottlenecks?

I'd say 2 parts. So one is, again, the move to extended factories is really fortuitous timing because it allowed us to be able to have partners that can expand alongside of us and give us excess capacity in these new clean rooms without us having actually put out a lot of CapEx dollars, right? So that's been a big benefit for us. On the supply chain side, like anybody that says it's perfect is kidding you. But the reality is our operations team has done a really good job of kind of diving our way through the supply chain, using the incremental visibility that we see from customers and being able to, I think, get ahead of where we see potential bottlenecks. Certainly, we're using our balance sheet a little bit. Our inventory balance has grown, but I think we're doing a good job of mitigating that risk. Never perfect, but overall, we're not missing customer dates and our lead times have really not grown too much.

All right. That's good to know. And we are out of time right now. So thanks, Mike and Brian, for coming to our conference.

Thank you very much.

Thanks for having us.

Good day, and welcome to the Onto Innovation Second Quarter Earnings Release. Today's conference is being recorded. At this time, I would like to turn the conference over to Sidney Ho, Vice President of Investor Relations. Please go ahead.

Thank you, Rachel, and 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 17, 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, Mike Plisinski. Mike?

Thank you, Sidney. Good afternoon, everyone, and 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.

Now with the successful launch of the Dragonfly G5, we're 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 OSAT 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've received over $50 million in orders to support this inflection with roughly 2/3 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 market 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 grew -- 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 20-nanometer where smaller spot sizes and increased precision is difficult to achieve, but vital to ensure high yield. So 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.

And 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. And 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, and 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. And 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 SDI, declined sequentially as expected, but will rebound back to Q1 levels next quarter. Software and services comprised 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. Importantly, we're also gaining additional leverage across our operational teams as we delivered a 30% operating margin in Q2 an increase of nearly 500 basis points from the beginning of the year. As of June 30, we have nearly $1.9 billion of cash and short-term investments on hand. In the second quarter, we generated $62 million of cash from operations or slightly over 100% of our second quarter net income. While we are in a cycle of increasing inventory to ensure continuity of supply chain, and to support the revenue acceleration in the business, we remain committed to strong cash generation and active working capital management.

In May, we completed a $1.5 billion 0% interest convertible debt offering maturing in 2031, which generated about $1.2 billion in net cash to the company. The remaining $300 million was used to repurchase shares, totaling approximately $200 million of our common stock and to purchase cap call, which increases the strike price for dilution purposes, to $509.06 per share and for professional fees related to the transaction. For Q2, we reported earnings of $1.93 per share, reflecting a $0.20 increase over the high end of our previous guidance range. Now let me provide some forward-looking thoughts for the second half of the year. With the surging demand environment, coupled with strong operational execution, we are raising our revenue, margin and earnings per share expectations for the second half of 2026.

Building off our strong first half results, we are expecting revenue to grow more than 25% in the second half of the year. Specifically, we expect Q3 revenue in the range of $380 million to $400 million with an additional uptick in Q4. While Cognizant of continued headwinds, for example, around certain material input costs, fuel surcharges and freight expense, we anticipate additional gross margin expansion in the second half of 2026 of an incremental 50 basis points per quarter in Q3 and in Q4. We expect operating margins to increase by 200 basis points to 32% in the third quarter and to exit the year at an operating margin of 33% or higher. Earnings per share at the midpoint of the Q3 guide would approximate $2.28 per share. This assumes a non-GAAP tax rate of 15% and slightly more than 50 million shares outstanding. And with that, let me turn it back to Mike for some closing thoughts before we take your questions. Mike?

Thank you, Brian. Our record quarter and improved outlook for the second half of 2026 reflect deepening customer engagements across several of the most important technology trends shaping this new era for semiconductors. With industry analysts forecasting hyperscale capital expenditures in 2027, north of $1 trillion, it's clear that demand throughout the semiconductor value chain remains high and gated by new fabrication facilities coming online. We believe our customers are confident in their visibility and in turn, continue to provide us exceptional insights into their multiyear capacity plans.

In response, our team is focused on enhancing the level and pace of innovation as well as our delivery of that innovation through global operations and support excellence. As a result, our metrology suite is expanding across both logic and memory customers, setting new records in OCD films and integrated metrology. Demand for our Dragonfly inspection led by the significant performance improvement of our new Dragonfly G5 is increasing rapidly across a broadening set of heterogeneous packaging applications. New market opportunities in silicon photonics, surface charge metrology and an X-ray solutions for 3D and exotic materials in partnership with Rigaku will only expand our opportunities as we look into 2027 and 2028. And as we grow, we continue our relentless focus on identifying and realizing efficiency gains across our global team. We are starting to see the results.

And as Brian noted, we are on track to deliver 350 basis points of gross margin expansion more than 750 basis points of incremental operating margin in 2026 with continued advances expected in 2027. A large driver of these improvements is the significant enhancements to our operational foundation with the successful ramp of our extended factories in Asia. These partnerships provide us with increased operational flexibility at a significantly reduced level of capital expenditure allowing us to lower cost and focus investments on the technology and application expertise our customers depend on, adding fuel to our engine of growth. And now, Rachel, let's open the call for questions from our covering analysts.

[Operator Instructions] We will take our first question from Craig Ellis with B. Riley Securities.

And congratulations on the very robust execution team. Mike, I wanted to start with you. We've got a number of financial records that we're talking about today. So I'll focus a question on one of them. Of the $1.1 billion backlog, can you provide some color on some of the mix dynamics that you see in that backlog and some of the duration dynamics that you see? And where I'm headed is, can you help us understand the confidence that large backlog gives you, as you look at 2027 and the levels of revenue and the year-on-year growth potential.

Sure. I think the backlog is a strong indicator of our customers' confidence more than anything else. They're confident in their expansion plans. They want to secure supply they need from their critical suppliers such as us. And so they're confidently issuing purchase orders well in advance of the historical norms. So I think that's a great takeaway and that's why we shared it. As far as the mix goes, I think, obviously, we still have several months left, several -- well, many months, 4 or 5 months left in this quarter. Probably 60%, 70% of it is tied to this year, but 30%, 40% is covering 2027, and it's still early.

So I think it bodes well for another year of strength in 2027, the discussions we're having with our customers is quite constructive for 2027 growth and growth dynamics. As far as what's in the backlog, I think it's just a continuation of the trends we're seeing, relatively strong packaging across both memory and logic. Basically HBM and 2.5D Logic as well that includes OSATs and a broadening customer list there, as well as the advanced nodes where we expect to see the meaningful continuation of the growth that we've had the last 2 years really.

That's very helpful. And Brian, I wanted to ask a follow-up to you, if I could. As Mike noted, stellar gross margin progress this year tracking to 350 basis points, the question not looking for guide, just looking for some color is that as we look beyond this year, from these last year levels than we thought we were going to have starting the year. Is there still gross margin expansion potential when we get into 2027 and at the current pacing, it seems like we could get to a level that starts with a 6. I'm just wondering if you have some comments on those prospects.

Sure, Craig. Thanks. I mean one of the things that gives us a lot of confidence as we look into '27, even though we haven't put together a formal plan yet is the contribution from Dragonfly G5 is still a smaller portion, a smaller proportion of our overall revenue for 2026. And as we've talked about, as the G5 continues to ramp up and becomes a bigger percentage of our business, there's an average selling price lift that goes alongside that, that helps give us a lot more fuel for our gross margin. So certainly, in 2026, a lot of the growth has come from the move to the extended factories and all of those things that we've talked about there around the localization of supply chain, saving freight costs, lower labor costs that we've been able to tap into, '27, I think, will be a combination of that continuing to scale along hopefully, with some ASP growth as the mix changes in the business. .

We will take our next question from Melissa Weathers with Deutsche Bank.

Thanks for having me on the call and congrats on the nice results. I guess when we look at the results you guys are seeing and some of the backlog you're seeing, is there any way you can help us parse out how much of this is just a faster TAM or SAM growth in the industry getting better? And how much of it could be share gains or new product wins. Just any way to think about how much of this is industry-wide versus you guys gaining some incremental share?

Sure, Melissa. I think it's a little of both, right? So of course, the industry is growing aggressively. But if you look at our peers. I think we're growing above that. And then you can start playing some games around the base and this and that. And so I'll leave that all that tough math to you. But from what we see, customers are adopting, finding new applications and adopting the Dragonfly in new areas at a much stronger pace than even we expected 3 months ago. We're adding new customers. Those customers are adopting the products in a broader way. So that's a mix of both their demand as well as share gain opportunities. .

I think the metrology business is also doing a great job expanding their footprint in the factories, some of those records we talked about, whether it's Iris films or in the integrated side, there are new applications in there, for instance, in logic, that are all share gain. We didn't -- a year ago, we wouldn't have had hardly any, maybe 0 logic for integrated metrology. So I think it's really a mix. It's both, I'd say.

Great to hear. And then as we think about your capacity to support this growth into next year, it seems like momentum is building. So any guardrails you can help us around like what is your revenue capacity? What kind of steps are you taking to expand capacity? Just anything we should be thinking about on the supply side?

Well, in the past, we've said that we had the capacity for $2 billion with our in-house factories. Since then, since that time, we've now added essentially the equal capability with our extended factories. And in fact, what we're seeing is those factories are reducing cycle times, adding second shifts with the capability of even third shifts so that capacity is actually much higher than our factories here in the U.S. So we're not capacity constrained, supply chain constraints, that's always a concern. We've done a great job managing supply chains throughout both the COVID time frames where we met all shipments and commitments to customers. We're continuing to do that now even as we see quite strong phenomenal growth. We're working closely with our supply chains. We're leveraging our balance sheet a little bit, and we're making sure that we can meet our commitments to customers. .

We will take our next question from Brian Chin with Stifel.

Nice results. Maybe first, in terms of the increase to -- I think it was 80% or at least 80% growth in inspection this year. Mike, can you outline a few of those drivers that have filled in or picked up for you across packaging in the back half of the year. Are you beginning to ship some follow-on systems against the HBM and 2.5D Logic wins that you announced earlier in the year? Or maybe Gen 5, as you mentioned, is that big a driver this year, but should be next year. Can you also lay out maybe take a guess that with that Gen 5 versus Gen 3 mix could be for Dragonfly in '27.

Yes. We won't -- the Gen 5 mix is going to increase. That's kind of obvious, but we're not going to quantify that just yet because I think even our customers are working on that for themselves. So I think the Gen 5, the excitement around Gen 5 is the new applications it opens up with its higher resolution and opportunities to grow into segments where we perhaps weren't as well suited before. So that's super positive. As far as the mix of the growth now, it's essentially an expansion of the 2.5D, so that's the OSATs picking up more volume. It's new innovative packaging technologies that some of the customers are adopting that we've already been well positioned for.

But driving growth. And for sure, it's HBM, where we've seen really phenomenal growth in both 2.5D -- sorry, both 2D inspection as well as 3D metrology. So there is some pickup from our 3DI as well as new applications for our subsurface inspection, where we've seen very strong growth this year as that product becomes more critical for 3D or heterogeneous packaging applications. So the reasons are varied. But at the bottom -- at the end of the day, it boils down to really strong demand for the flexibility and value proposition that the Dragonfly offers our customers.

Great. I appreciate that. Maybe for the follow-up question. Specialty, I think you came into the year expecting that to be maybe down a little bit year-on-year. Can you kind of outline how that's improved? And kind of if you expect that to be sort of contributor to growth next year? And also for silicon photonics that you referenced, are you -- is that -- you put that more in specialty? Or is that really advanced packaging relative to the application?

Silicon photonics is for sure in the specialty segment, similar with Power. Power would be there as well. We're definitely seeing kind of a little bit better on the Specialty, probably helped by the silicon photonics, where it's more flat versus the down we originally expected at the start of the year. As far as next year grows, I think depending on what Power does, we're certainly seeing and we talked about the silicon photonics, that's a potential for some incremental adds next year. And if Power recovers, as we're starting to see some indications of, we should see the Specialty market start to grow as well. That won't offset -- or that won't be close to the growth we're expecting from the packaging side. .

We will take our next question from Edward Yang with Oppenheimer.

Brian, thanks for the time an impressive quarter. I just wanted to double click on this backlog and also the step-up in revenue growth. And correct me if I'm wrong, but the last time you mentioned backlog was in fourth quarter. And at that time, it had doubled to about $0.5 billion. So now it looks like it's double again to $1 billion here. So with the step-up in the second half revenue growth to 25% versus 15% previously versus the first half and the backlog above $1 billion, is that still accelerating as revenue steps up or is business now moving into a more stable elevated run rate from these levels?

It's hard to answer that because we don't get steady streams of orders. We'll get a large chunk. We finished negotiating a VPA and then that's followed up by a large chunk of orders and then some fall off mostly in the last month. So it's hard to say, okay, what's the book-to-bill? How are things accelerating? I would say the general feeling is that backlogs are growing. I mean, that's good. So we are seeing strength in the backlog. But we're also shipping more and more products. So what we're seeing really is a confidence from our customers to commit to longer -- to make longer-term commitments so that they can secure their slots in order to meet their ramp plans.

And so -- from that perspective, I would say the better indications of where the markets are growing are in the kind of growth plans and the capital expense announcements from our customers.

Okay. And just following up on that, it sounds like the implied revenue for fourth quarter is about 3.5% sequential growth. You're guiding to almost 14% sequential growth in the third quarter. Could we see upside to that? Or is there any sort of seasonality that would imply a slower sequential growth in that quarter?

For Q4, I mean if you just use the midpoint of the revenue guide that we gave at 390, the 25% kind of growth number as a floor would put you somewhere into the low 400s for Q4. So I think the sequential growth continues at a pretty rapid pace as we move from Q3 into Q4. So we'll see exactly as orders come together from a shipment perspective of when things go out the door and sometimes that depends on customers' ability to take something and have it show up on the dock, but we're feeling pretty good about the back half of the year, into the first part of '27.

We will take our next question from Matthew Prisco with Cantor.

I guess, first one to dig into advanced node and kind of product cycle story there. Can you give us an update on traction and customer conversations you're seeing on G5's potential penetration into the front end? And then -- maybe any update on what you're seeing in RSG2 as well.

So with RSG2, we've made several shipments, and we're working through the normal installation, qualification, then performance testing against the specifications customers want to see. So that process is ongoing. And like we've said in the past, generally, these last 6 to 12 months. So hopefully, we'll be able to accelerate some of that, but it's basically going according to plan. And that's similar with the G5 for front-end applications. We've got to basically some delivered. So we're starting to run some samples through the tool and compare against the incumbent. We're also running a lot of samples in the application centers. We've talked about that in the past. So in our application center. So customer interest seems quite high. And again, we'll probably see bigger contributions from that in 2027 not as much in 2026 as we've been consistently reporting.

Helpful. And then maybe can you give some more color on the visibility you're seeing today, maybe how does that vary across end markets, what type of lead time are you seeing? And how do you think that sets you up growth in 2027 maybe versus a WFE market that's now being discussed in $190 billion to $200 billion range for another 30% growth year.

Yes. It's a good question. I would say the biggest change in visibility. Advanced nodes has historically had a better visibility than advanced packaging. So for us, the biggest change or improvement is in the advanced packaging piece, which given the magnitude of advanced packaging revenue for our company, that's a fairly significant improvement in visibility for us, well over half the business tends to be from the advanced packaging markets. So that -- and I explained on the call, the reason for that is it's being driven more from the AI hyperscale demand versus consumer demand, trying to predict if everyone is going to buy new cell phones or not.

That was always a much tougher challenge for our customers.

And then maybe how do you think about that positioning in 2027 given that the visibility versus the market?

I knew there was another part of the question. And unfortunately, we're not really prepared to talk about 2027 yet. However, we don't see any reason. We can't continue to outperform the market based on the opportunities we see with the new products that we're releasing and the early demonstrations we've talked about, those would be SAM expansion opportunities for us. So revenue gains, even if the market is flat, there would be an upside for us as well as the ongoing demand we're seeing for the Dragonfly platforms in advanced packaging, our metrology suite and the advanced nodes, some incremental opportunities perhaps with the Rigaku partnership. There are several areas that would indicate that we have opportunities to outperform in 2027.

We will take our next question from Crawford Clark with Jefferies.

Guys, thanks so much for having me on. I appreciate it. And I think -- I'm not sure if this has been asked yet, but obviously, tremendous growth in the advanced node business, up 50% to a new record. Can you talk about how broad-based that was across maybe logic versus memory? And how much of it is new application wins for data around versus maybe a next versus maybe higher spend on existing tools.

Yes, great question. It's actually pretty broad-based. So we saw strong growth in NAND off of a small base, but still quite growth in NAND. We saw growth in DRAM. We saw growth in Logic. We saw opportunities or growth in the adoption of the Atlas V, but is even more so in the Atlas G6, which is really starting to differentiate itself with its much smaller spot, being able to measure with much tighter precision in the smaller area, this is giving customers opportunities to apply OCD to other parts of the wafers where they had to use test structures and in the street.

So that's a big value proposition for our customers and it's starting to drive adoption. And I mentioned on the -- in the prepared remarks that we added DRAM customers. So in addition to the gate all around or the logic customers we talked about last quarter. Now we have DRAM customers adopting the new technology.

Just to add back in the prepared remarks, I mentioned that memory was up 60% quarter-over-quarter and Logic was north of 40%. So across both, you can see really, really strong performance.

Got it. Super helpful. And then I'll just ask 1 more. I mean there's a ton of kind of stuff in the news about panel-level packaging. It feels like I get a news flash every day about something panel related. I think you guys attack is from maybe 2 different perspective. I think you have the JetStep program or platform. But I think you also address it sort of from maybe another angle. If you could kind of help me better understand the opportunity there, that would be super helpful.

Yes. So in fact, we attack the panel market from 3 perspectives. One is the JetStep for large panels. So if we look at the panel market, it's really in sort of bifurcations. One is large panels. So large square substrates, say 500 by 500 and above 500-millimeter by 500-millimeter and above. The other is driven through TSMC, and that's their Copas, and that's 310 x 310 square panels. And then the copas area, we're looking at inspection, metrology, essentially, a lot of the packaging technologies that they've adopted from us for process control in COAS are being applied to CopaS. Now in the larger panels, we have the JetStep, which you mentioned, but we also have the Firefly, which is now adopting and integrating the Dragonfly G5 optics, so it has the most advanced optical platform as well as several of the metrology sensors that the Dragonfly is well known for.

This is giving the panel market a suite that is capable of much more process control and hopefully unlocking yield improvements much faster than they were able to achieve when they were just using inspection at the final stage of a panel fabrication.

We will take our next question from Vedvati Shrotre with Evercore ISI.

So Mike, on the advanced node strength you're seeing and even on the packaging strength you're seeing, could you give some color on how this splits out foundry logic versus memory for advanced node and HBM versus non-HCM, I guess, on advanced packaging piece?

I'll take that one. So with an advanced node -- sorry. From a memory perspective or advanced nodes, memory is about 60% of where we were in Q2, and logic was about 40%, and the growth rate just happened to kind of be similar. On the AP side, I think as we've talked about, both the 2.5D and HBM have both been relatively the same. So pretty consistent growth across both over both the whole first half of the year, to be honest.

And does that stay the same in second half as well when we think about the total year?

I think expectations wise at the moment, yes. I mean, HBM is continuing to be pretty strong. So it may take a little bit more, but both of them continue pretty much a similar pace.

And the other question I had was, we're kind of entering this time of unprecedented visibility you're seeing your backlog kind of keep on growing. How -- like does your visibility extend into second half '27 now is kind of that level of visibility you get from your customers?

Yes, visibility through discussions through planning cycles, things like this, yes, I think not a lot of the backlog is going to start extending into the second half -- but for sure, the discussions, like I mentioned, are constructive, and we're now in the process, starting the process of discussing VPAs and volume purchase agreements for 2027, which will further add to the visibility or confidence in 2027. And this is the normal cycle that we're in. .

We will take our next question from Shane Brett with Morgan Stanley.

So my first question, I want to follow up on some of the earlier questions on the advanced node business. So that's growing north of 35% despite process control intensity in the industry not being as favorable just with quite a bit of 3-nanometer and 1 CDRAM editions. And just ahead of peers. So is this outgrowth reflective of your portfolio being more memory skewed? Or are we capturing just incremental dollars related to the broadening of the leading-edge logic customer base?

It's a good question. I don't think it's because we're more memory skewed. Historically, we've kind of been pretty balanced between DRAM, logic and NAND, and of course, if you add them up, if it's roughly 1/3, 1/3, 1/3. Then we started to see a shift more towards 50-50, 50% logic, 50% memory, and then that will fluctuate around there. So I don't think that, that explains it so much. I would say that the combination of us adding new products, getting those new products adopted and growing. That's the iris films, that's the integrated metrology. That's expanding our opportunities for growth even at -- or wallet share for every, let's say, dollars tied to a 10,000 wafer start expansion, which has always been a part of our core strategy is to leverage the technology, provide new solutions, expand our SAM within the customers that we serve.

Got it. That's helpful. And I have a little bit of a mixed question as well for advanced packaging. So how should I think about your relative share between colos, SOIC and HBM? And I'm asking this because this year is quite a bit of quite a bit colos intensive, but with next year being a bit more HBM and SOIC, is that mix shift kind of a tailwind or a headwind for you? Like is there one area where you prefer to grow rather than another?

I don't have the exact numbers in front of me, but generally, our strategy and focus is to broadly serve the value chain. So like we mentioned today on silicon photonics, we're already focused on engaging in these new areas of potential growth, these new waves of growth. So I see as one of the areas that the Dragonfly G5 with its higher resolution has some new opportunities in. So that would be part of the upside potential that we would be looking at. I think what else would you say mention packaging. Yes. So I think that's it. I don't know if there's one -- let's put it this way. We're not expecting, based on the feedback we're getting from customers on where their growth is and what tools they need us to be preparing for, we're not expecting any kind of headwinds going into next year. We're expecting quite nice tailwinds.

Got it. So kind of like an end market agnostic then?

We try to be, yes. .

[Operator Instructions] And we will take our next question from Nazerke Baimukan with Freedom Broker.

Congratulations on the strong results, and -- so you highlighted silicon photonics as a new growth opportunity -- could you please explain which onto products are being used and how you expect demand scale as customers move into volume production.

Yes, good question. It's both infection and metrology, where we're seeing the traction. I think the biggest let's say, value or traction within those markets is the inspection because it has some integrated -- some metrology built into it. But then for very specific or more precise metrology, films metrology and front-end metrology, we're seeing opportunities for the Iris films. So both are in play. And as that market scales, we would expect to see a fairly linear ramp of the process control technology with the volume. And as we mentioned, we're expecting that SAM to grow to about $500 million or so by the end of the decade. So in the next 4 years.

And a follow-up question regarding advanced packaging. Could you please clarify the updated stand-alone growth outlook for advanced packaging -- looking into 2027? Do you expect growth to remain elevated? Or should we expect some moderation after the strong capacity build out this year?

Good question. What we said in the prepared remarks is we expect advanced packaging to grow at least 80% this year. So we expect that to grow again into next year. And so we're not seeing any signs of overcapacity. We're actually seeing -- we're hearing about constraints and pressure from our customers' customers on ramping more capacity, releasing more capacity. So we're fully expecting additional growth into next year through next year. .

And at this time, we have no further questions. I would now like to turn the call back to Sidney Ho for any additional or closing remarks.

Thanks, Rachel. We will be participating in a number of investor conferences throughout the quarter. We look forward to seeing many of you here 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. Rachel, please conclude the call.

This does conclude today's call. Thank you for your participation. You may now disconnect.

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

Thank you, Taren, and good afternoon, everyone. Onto Innovation issued its 2026, first 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 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. The Onto Innovation team is off to an outstanding start to the year as the momentum in our business continues to build in support of strong demand for AI compute. This surge in demand across both front end and advanced packaging resulted in first quarter revenue above our original guidance range and is expected to continue with the heightened outlook for the second quarter revenue which at the midpoint represents a 20% increase year-over-year. Momentum should continue into the second half of the year with rising customer expansions enhanced by accelerating new product adoption and a growing backlog, all indicating more than 15% sequential revenue growth in the second half of the year.

In total, we expect revenue growth of more than 30% in 2026. This momentum is driven by the insatiable end market demand for high-performance compute and supporting process technologies, including silicon photonics. Customers benefit from our broad and synergistic portfolio of optical process control technologies, which through our software are capable of working together to provide more actionable intelligence to manufacturers. The announcement of our strategic collaboration with the leader in X-ray technology, Rigaku, expands this capability significantly. So while optical metrology is preferred for high-volume manufacturing, additional needs are emerging as manufacturers increase the application of exotic materials and 3D structures at transistor and chiplet scale, which is where the penetration power and precision of X-ray technology can provide additional information about material composition and underlayer data to potentially improve optical metrology robustness.

The key to realizing this benefit is our AI to fact software, where our customers were the first to see the potential benefits of leveraging AI to frac technology to unleash the strength of Rigaku's X-ray system to solve process metrology challenges where other suppliers struggled. Now with 2 competitive wins in hand and several other evaluations planned across memory and logic manufacturers we are confident that the value of this combination to our customers will increase.

In addition to revenue from licensing AI do frac to support Rigaku X-ray systems, another revenue stream involves the development of more complex hybrid metrology solutions to provide unique production capable metrology by combining the strengths of optical and X-ray technologies. The breadth and depth of Rigaku's X-ray technology makes them an outstanding partner as they enjoy 1 of the broadest portfolios of X-ray technology spanning CD, materials analysis and films.

Rigaku has over 75-year history in X-ray with over $600 million in 2025 revenue, of which approximately 40% is related to the semiconductor industry. We are proud to be working together, and our investment of 27% of the business, which provides us a seat on their Board of Directors will further strengthen our long-term alignment, provide deeper insight into X-ray technology road maps and position us to jointly advance next-generation hybrid metrology solutions. So while the Rigaku partnership expands our opportunities for growth tied to future process challenges, today's process challenges are driving increased demand for our solutions in both advanced packaging and advanced nodes.

Starting with advanced packaging, we're, of course, thrilled to have announced our qualification adoption of Dragonfly G5 inspection system at a leading 2.5D logic customer. so closely following our wins in high-bandwidth memory for both 2D inspection and 3D metrology. Our team did a phenomenal job to accelerate the delivery of this completely new platform which delivers improved sensitivity, high throughput and the flexibility of multiple sensors to provide a compelling and differentiated value proposition to the customer. Shipments to customers are ahead of plan, and we are actively engaging with new customers and applications with a pipeline of over 15 distinct applications across over 10 customers, the outlook for Dragonfly G5 is very promising providing opportunities for both share gains in current markets and expansion into new markets.

Just as 2D features within shrinking rapidly, so are the 3D interconnects between die. Two years ago, the most advanced bumps were approximately 15 to 25 microns high. Today, we're sampling bumps below 6 microns in height. This adoption of smaller, more dense bumps plays to the strength of our 3DI technology and has led to several more OSAT customers and over 10 additional orders in the quarter. Finally, the strong demand for AI and the industry constraints in packaging capacity are causing customers to look at additional processes such as panel-level packaging, where larger substrates can provide for greater economies of scale as the adoption of heterogeneous packaging drives larger package sizes.

We're pleased to learn that JetStep was recently qualified at 2 packaging suppliers to AI device manufacturers with ramp-up expectations in 2027. Considering all of these growth drivers, we believe our advanced packaging revenue will grow more than 50% in 2026.

Turning to our Advanced nodes business. It continues to strengthen across both logic and memory. Adoption of our Atlas G6 platform is expanding following successful competitive head-to-head evaluations at several key accounts for next-generation logic nodes, while in memory, we're seeing solid traction as DRAM customers ramp development of next-generation devices. Additionally, we secured a new application win for TSV metrology using our Atlas system, with initial shipments expected to commence in the second half of the year.

With this broad-based strength in logic DRAM and early signs of recovery in NAND, we now expect our advanced nodes business to grow approximately 25% in 2026, ahead of the average WFE growth expectations in the low 20s. And with that, let me now turn the call to Brian to review our financial highlights and provide second quarter guidance. Brian?

Thanks, Mike. Good afternoon, everyone. As Mike noted, 2026 is off to a strong start for Onto Innovation as we exceeded the high end of our first quarter guidance range across all key financial metrics, including revenue, gross margin, operating margin and earnings per share. Revenue of $292 million increased nearly 10% sequentially on strength primarily across our advanced nodes business, highlighted by adoption of the Atlas G6 and our inspection products, including the initial commercial shipments of the Dragonfly G5. Specialty device and AP was approximately $160 million in the quarter, of which 2/3 was advanced packaging $25 million related to semi lab and the remainder specialty device, including power semi.

Advanced nodes was approximately $80 million, of which 60% was memory, primarily DRAM and the remainder logic. Software and services comprised the remaining first quarter revenue. Despite increasing headwinds around certain material input costs, such as memory and higher fuel and shipping charges, we demonstrated solid margin performance as gross margin improved sequentially by 110 basis points to 55.7% and operating margin increased by 150 basis points to 26.7%. Our performance reflects benefits recognized primarily from our move to extended factories. Earnings per share were $1.42, reflecting a 13% improvement over Q4 2025. On April 20, we announced the deepening of our strategic partnership with Rigaku, including the purchase of a 27% stake in the company from Carlyle Group for approximately $710 million. The deal is expected to close in the second half of 2026 and be primarily funded with cash on hand.

The strategic rationale, as Mike discussed, is clear, but let me take a minute to discuss the financial side of the transaction. We will account for the purchase using the fair value option method for investments, which simply means the deal would be recorded at cost. And then each reporting period, we will show an unrealized gain or loss based upon the movement in Rigaku stock price. This will be reflected in the other income section of our P&L. While Rigaku's financials will not be consolidated into our numbers, we see 3 primary benefits which will enhance our financial results. First, Rigaku's X-ray tool integrated with our AI to frac software will generate incremental licensing revenue to us at nearly 100% margin. Second, we expect we will sell additional metrology tools such as our Atlas G6 to customers who are using the integrated X-ray tool. And third, we expect Rigaku will continue to pay dividends to shareholders which equates to approximately $7 million or more per year based on our expected ownership stake.

Within a year of the close of the transaction, we would expect that the income generated from these 3 sources will offset any foregone interest income on cash used in the deal. Now let me discuss our outlook for the second quarter with some thoughts on the remainder of 2026. We previously announced on April 16, our Q2 revenue expectation of $320 million to $330 million, representing at the midpoint, a 10% increase to previous analyst expectations and 28% year-over-year growth. As we look to the second half of this year, revenue is expected to accelerate to at least 15% growth over the first half of 2026. This translates to 2026 revenue greater than $1.3 billion.

Alongside this outstanding revenue result is our expectations for continued second quarter gross and operating margin expansion. While we do note increasing headwinds around certain material costs, fuel charges and investments in our R&D and services teams to support the revenue ramp, we are confident in our ability to show continued margin expansion. We currently expect Q2 gross margin in the range of 56% to 56.5%, operating expenses of $90 million to $92 million, operating margin in the range of 28% to 28.6% and earnings of approximately $1.69 per share at the midpoint. This assumes a non-GAAP tax rate of approximately 15% and slightly more than 50 million shares outstanding. While closely monitoring macro and micro headwinds impacting our cost structure, we remain confident that we will improve gross margins in Q3 and Q4 at a rate of at least 50 basis points per quarter and exit Q4 with an operating margin greater than 30%.

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 of our execution and the accelerating momentum across our portfolio. We exceeded expectations in the first quarter, advanced our leadership in advanced packaging with the successful qualification of Dragonfly G5 at multiple key customers and took a major step forward in our metrology strategy through the partnership and investment in Rigaku. At the same time, our operational discipline continues to enhance scalability and drive strong margin expansion.

Our visibility continues to strengthen, supported by record backlog, new product momentum, and deep collaboration with customers as we work together to solve their most critical process control challenges. With this visibility, market expansion and our relentless drive to improve operational efficiencies, we believe Onto Innovation is well positioned to not only outperform this year but also carry that momentum forward into 2027.

And now, Taren, let's open the call for questions from our covering analysts.

[Operator Instructions] We'll take our first question from Craig Ellis with B. Riley Securities.

Congratulations on the real strong execution guys. Mike, I wanted to start with a question on Dragonfly G5. So clearly, you got a marquee win that starts to ship in 2Q, which is great to see. Can you just talk about the way the pipeline allows for visibility for growth through the back half of the year? And then what are you hearing from customers with Dragonfly G5 relative to 2027?

Great question, Craig. So from the G5 perspective, one of the, I think, comments I made is that we're actually getting requests to pull in and serving those requests to pull in G5 shipments. So in fact, we'll be shipping -- we've shipped several systems in Q1, will be shipping more into Q2 and even more in Q3 and Q4. So we see a steady growth in demand for the G5 throughout all 4 quarters. So that's an acceleration or pull-in of the G5. From a perspective of 2027, we certainly, from those existing customers, we certainly have visibility into stronger demands, as you would expect, as they get cut into production as that production expands in '27, we have -- listen, that's what we're expecting. But I also mentioned that we have a very strong pipeline of application studies. And I highlighted that these are both studies in existing technologies, so existing markets we serve as well as new markets and those applications are going quite well, which would imply, if successful and resulting in orders imply significant expansion in 2027.

Very good. And then the follow-up question is on advanced nodes. So we're significantly raising our view for advanced nodes growth this year to 25%. Can you just talk about some of the end-use drivers for that? And how we should think about linearity as we go through the back half of the year in '26?

So for us, the advanced nodes, the biggest driver is, of course, the Atlas OCD metrology and some of the latest capabilities we're providing customers is with smaller spot. So being able to measure in die -- in the actual die to provide more process information that the customers can use to improve yield. Historically, spot sizes were too large to do that, and you had to measure in some sort of test areas. Customers prefer to do it on die if possible. So we're seeing good drivers from that. We also are working on the integrated metrology, and we've had some good progress in integrated metrology from larger customers, building on the strength we have in the memory market. So that also contributes to some of the growth we're seeing as well as in the film. So the Iris films tools, we're seeing some level of growth there in the common films, but we continue to work with customers on the critical films as well and hopefully see that contributing to some exciting news more towards the end of this year and into 2027. So that's what we're seeing on the advanced node side. .

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

Ezra Weener for Blayne. Just the first one. Last quarter, you were talking about a big VPA potentially being 2/3 weighted into '27 and could get pulled in half-half theoretically into '26. Can you talk a little bit about what you're seeing in terms of demand from customers from a timing perspective, maybe you're seeing pull-ins?

Broadly speaking, we are seeing pull-ins, but not at the expense of the 2027 numbers. So it's really more of a broader rising of the tide. The pull-ins if you look at '26 and '27, a lot of these expansions are tied to new fabs coming online versus filling up excess capacity or excess -- yes, capacity in existing fabs. So the pull-ins are if the customers are able to ramp up a fab quickly enough and they want to take some more tools or we had some share gains and we see a share shift and they want to pull in some tools. But it's not at the expense, what we see so far of '27. In fact, '27 continues to look much stronger even than '26.

Got it. And then just a follow-up. Dragonfly G5 was looked at as a margin improvement story versus G3. Can you help kind of talk about how much you're seeing that actually impact margin?

Yes. So it's for sure going to be an improvement in margins is a completely new tool with a significant improvement in value proposition to the customers. So Overall, the cost of ownership is for the customer much more attractive. You're not going to see the margin improvement in the initial first half of the year because the relative volume is low as we continue to ramp it throughout the second half of throughout this year. So going into the second half, where I expect you to see a more significant impact is in 2027 when the -- when that transition to Dragonfly G5 is much more predominant, much stronger, and it's a higher percentage of the overall inspection revenue.

We do continue to expect to improve the gross margins throughout each of the quarters throughout this year.

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

Congrats on the G5 foundry qualification. That's a big win for you guys. Maybe, Mike, -- can you give a little bit more detail on why the foundry customer like the new platform versus other options and are you expecting any share recapture, new layer wins or broader customer application expansion related to G5?

So I characterized it as a 2.5D logic customer. I didn't say boundary per se. So we'll just stick to 2.5D logic. But I do expect -- so in the head-to-head, you have to win and if you win, then you get more orders. So that, by definition, means that we're going to see some opportunities shift back to us that were either served by us before or new opportunities for us. Again, driven by the higher resolution and the compelling value that the flexibility of the Dragonfly delivered to the customer. I think you also asked what the -- why the win. Again, we've been in this market for a long time. Packaging is very different than the front end. Our tool is designed for packaging. What we needed to do is deliver on the high resolution piece. We've done that. We are seeing things now below 200 nanometers, where historically, 800 nanometers might have been about the limit. This is a combination of new optics, new camera, new staging, basically a ground-up system, but leveraging all of our experience and the challenges in packaging with Wafer Warp, with rough surfaces due to different types of CMP polishing, leaving rough surfaces for metal metal layers and things like this.

So all of our algorithms and experience helped to create a very compelling system. And in addition, we added some new capabilities, die-to-die algorithms that allow us to eliminate die variation. I think that's a significant improvement, complementary to our golden die. Algorithms from the past. So yes, I think there's a variety of reasons. And at the end of the day, the customer just wants the best cost of ownership, most flexible system for the valuable fab space that they have. So this system is designed for several generations ahead. And yes, we're happy we won and look forward to continuing to win.

That's very helpful color. For my follow-up would just be on the 2027 outlook. It sounds like you have a rich menu of growth opportunities. Obviously, a very favorable industry backdrop, but a lot of internal drivers as well. So if you were to rank order the opportunities you're particularly excited about, whether it's Atlas G6, Dragonfly, 3DI, Iris, JetStep, X-ray, et cetera. Maybe give some color around how you feel about 2027 and your ability to outgrow WFE.

You're asking me which of the children I love best. I think the highest growth and the highest contributions to growth or potential share gain opportunities will definitely come from the Dragonfly G5. I think it's expanding into or has the potential to expand into nearly $1 billion in new markets. That's exciting, and the existing markets it's serving are also growing. So I think there's a lot of opportunities for the Dragonfly, the Atlas G6 is making good progress in gate all around customers. That's going to continue to ramp and the OCD continues to be a critical component for process control in the gate all around technologies even as we look at integrating X-ray systems in order to extend the opportunities for OCD and expand the opportunities for OCD. These are complementary, not replacements. I think they work well together.

In addition, I think the surface charge metrology is another good growth area for us. We see more and more interest from -- especially from packaging as chiplet architectures become more of the more mainstream, the concerns around charge metrology or residual charge having an impact on yield, a direct impact on yield for a package is high. And so the products that we're coming out with and opportunities for the SDI, I think are continuing to grow. So that's another exciting opportunity. And of course, right up with that is the panel panel-level products we have with both [indiscernible] and the Firefly. We talked about some growth there as well recently and see a meaningful shift now with the panel market starting to gain traction and people recognizing some of the benefits there. So yes, I think that's -- and then there's some more...

You expect to outgrow WFE?

Yes.

Next year?

Yes, we do expect to next year as well. .

We'll take our next question from Matthew Prisco with Cantor.

I just wanted to start on the advanced packaging market and the kind of improved outlook there. Primary drivers within that who got incrementally strong over the last 90 days between maybe HBM CoCos like panel little packaging? And what's included now in that number from a G5 perspective?

And so for all the growth we talked about how much of it is G5, it's still relatively small. So call it, less than 10%, maybe even 5%. So it's ramping.

And then maybe how you think about all those other areas playing and being contributors to growth?

There are significant contributors to growth. So the G3 demand is still going up. The G5 is ramping every quarter. It's grown very dramatically. So it's starting from 0. Q1 is going to be a handful of tools Q2, Q3 has continued to nearly double each quarter throughout the year. So it's growing quite a bit. I think overall, yes, you're looking at over 50% growth in advanced packaging. And if I think about 2.5D Logic or HBM, they're very similar in growth outlook for us. Similar to what they were in '24 when everything is ramping. I think we talked about them split roughly equally. .

Got you. That's helpful. And then maybe -- can you talk a little bit more about the Rigaku collaboration and how you think about revenues there ramping in the second half, primarily it seems like starting with software? And then how we should think about that combo optical x-ray tool timing of that system and potential magnitude of that opportunity over time.

So the -- so on the software piece, we'll provide some more guidance as we continue to gain experience, putting in the -- working with Rigaku as they drive the sales. We're 2 separate companies now. So we're 2 separate companies. So we're dependent, our software attach rate to their CD X-ray tools is depending on CD X-ray tool pipeline. We've looked. We think it's quite healthy. We need more experience with how long it takes to close. And based on what we've seen, I would say we expect that software revenue to growth without '26 and then grow even further in '27 based on the pipeline we've seen. But we're now starting to leverage some of our contacts in the industry and with some of these customers looking for new opportunities now that we have a more solidified arrangement, and so that number could grow.

So we'll provide more guidance as we continue to work together. The new -- the hybrid metrology solution, that's further out. That is more working with customers, understanding their challenges and then looking at ways to combine information to provide production-worthy systems, and plus 2 kind of several generations out. OCD right now is going to cover through 1-nanometer type processes. There'll be some incremental sales we talked about. But the hybrid metrology is going to be more on some of the new technologies coming out in a couple of years. So that means we're starting now in R&D, working with our partners in the R&D space and then look at timing for HVM. That's where the real money will come in.

Matt, in its simplest form, as I mentioned in my remarks, I mean, if you think about just from an interest income or the foregone interest income and think about what needs for us over the next 12 months, we very confident that we will more than pick that back up. Through the combination of the licensing revenue that we've talked about is the primary kind of revenue stream plus then the dividend income that we'll see from Rigaku. So those 2 numbers together from an income perspective should offset what we were foregoing in interest. .

We'll take our next question from Vedvati Shrotre with Evercore ISI.

My first 1 is on advanced packaging. You talked about 2 growth opportunities, additionally, like silicon photonics and panel-level packaging. Can you help kind of size the revenue opportunity that could be here? And like when do you expect to start seeing volumes on this?

We're already starting to see some volumes in silicon photonics. And from a size, I think you look at the end market demand, and it's quite high. If you think about all the AI servers going in and all this desire to reduce the power consumption of those servers provide additional speed between the memory and the logic as well. So 2 different areas, silicon photonics are being used or co-packaged optics. -- it can mean quite a bit of volume, but the question is how quickly it gets cut in.

So we've talked about several different customers that we've already been selected and gaining traction, gaining orders. We'll -- we have a kind of a good visibility and pipeline into additional orders additional opportunities through the next, say, 12 months, I think from a sizing perspective, it's a little early to be too specific, but I would definitely see this as one of our high-growth areas from a relatively low base, but very high growth based on end market demand and need.

And how about panel-level packaging? And then I have a follow-up.

Panel level packaging, I don't think we've come off of the $200 million or so that we've said over the several years. That includes the JetStep and the Firefly. I would say there's more of a bias as the industry starts to shift to this where we see more manufacturers move to a panel packaging format, that number could go up quite meaningfully. But for now, that's sort of a range you can think about. .

Understood. And for my second question, so I kind of wanted to understand what your tool lead times are? You talked about some of the headwinds like the case. There's also some components like maybe specifically, are there any supply chain bottle necks that are starting to creep up on the tools?

I'm sure if you asked our COO, he'd say, "yes, plenty. But in general, we're managing through them. None of them are impacting our production and our commitments to customers. So we're doing a great job managing through the issues that pop up. This is one of the benefits of moving to the extended factories. We also through that process. did some pruning of our supply chain treat. So as we looked at shifting and who could support our overseas factories, we made some changes to certain suppliers that didn't have the scale and capability to grow with us. And so I think right now, we're in relatively good shape. Of course, lead times are extending out a little bit, but so far, no big issue and we're able to meet customer demand. .

We'll take our next question from Charles Shi with Needham.

Maybe the first question regarding the Rigaku to collaboration and the expected licensing revenue. I know you want to I mean spend a few quarters to understand how to better forecast and maybe guide, but -- and we also understand this is a highly complementary to what you have on the optical side, but -- can you kind of talk to us what's the expected licensing revenue? What is the economics that look like maybe on a per tool basis, each Rigaku to ship out how much licensing revenue can you get is at least give us some sense on the order of magnitude? Is it a few [indiscernible] a few millions. What is that licensing revenue expected would say economics?

Yes, we're not going to break that down for anybody. But Brian did a nice job highlighting the component. So if you look at potential interest income, of the investment that we made, and then you subtract out roughly $7 million for dividends, then the residual is what we'd expect to see from license revenue and from profits from potential hybrid metrology sales. So I think that gives you a rough idea. Overall, that is not game-changing for on to innovation, from a revenue perspective this year. The whole point is this is a strategic initiative that expands our opportunities significantly as we look out 3, 4, 5, 6 years ahead. .

Got it. maybe asking you a longer-term question regarding your positioning for hybrid bonding related inspection metrology opportunities. Definitely, I understood that you have a portfolio -- a strong portfolio across different platforms, Dragonfly, maybe EcoScan, et cetera, but Rigaku probably is also working on some x-ray-based solutions there. So how do you think about the positioning between your offering versus theirs and especially for some of the applications, there seems to be some overlap. For example, your EcoScan versus some of the tools extra based solutions they may be working on? How do you solve that overlap of maybe you maybe end up competing for some of the same opportunities? And any color, any thoughts would be great.

I think, Charles, you're very well informed. You picked about the only overlap that exists and we don't know a lot about what that is about. But there is a potential overlap in packaging for X-ray inspection. That, I think, between our Echo scan and that. At the end of the day, optical systems should always be much faster. The Echo scan, if it reaches its full potential, should be much faster and then it's going to be a benefit. The X-ray benefit is going to be precision and it's going to be penetration depth. So in that case, there could be opportunities where one is like -- if you understand inspection, which I know you do. One is the inspection tools. The other is the high-end review tool. So optical inspection and some review as an example. So they can work together. They can coexist.

And that's part of the reasons we like this expanded opportunity to expand the portfolio and together offer customers the best-of-breed technologies. So right now -- and that's about the only area. Otherwise, the films, the CD, [indiscernible] versus optical CD, all of these are complementary. If -- as long as the OCD can measure it, which so far, we've demonstrated we can push OCD technology beyond where most people thought possible, they'll go with OCD. But there are definitely gaps that we're starting to see, especially as 3D becomes more dominant part of the customers' process road maps where penetration depth is critical. And it's going to provide some insight into the OCD modeling engines that will make OCD more valuable or, let's say, extend OCD further down the line. To get the speed of with the precision and penetration depth of X-ray.

[Operator Instructions] We'll take our next question from Brian Chin with Stifel.

I will just ask a few questions. Mike referencing the 2.5D Logic win, are you baking -- and just to clarify, are you baking in a relatively modest contribution from Gen 5 sales to this customer in the second half could that be conservative? And also, when you think about that qualification, improving and strengthening your competitiveness for the variety of applications that customer has, can you [indiscernible] guess where your market share at that customer might shake out moving forward?

So I don't want to say exactly what could happen. But for sure, we've got new opportunities within the account that with the previous resolution and previous system that we couldn't serve. So we definitely see that. Could our forecast be conservative? Sure, it could be. Could there be upside to the second half? Sure, it could be. But we gave the guidance now and next quarter, we'll provide additional guidance and see how things shake out. But I don't think it's all tied to this customer, where we mentioned 10 additional customers looking at the G5 for applications, about 15, I believe, I said, over 15 applications, many of which we wouldn't have been able to serve in the past. So the opportunity to expand our overall SAM is also creating excitement and growth and upside for maybe second half, but definitely into 2027.

Yes. I mean kind of a mini question before I ask my follow-up. Relative to last year or the year before, there does seem to be a lot more breadth of potential customers as opposed to the recent years where it was pretty concentrated.

Yes, for sure. Yes. And we see this advanced packaging being migrated as customers try and focus in on their high value-add process steps and they outsource to others, some of the other process steps. We're seeing opportunities to -- well, we're not seeing the opportunity. We are growing our position in the outsourced partners. So we're definitely seeing a proliferation naturally through our customer base as well.

And then for the follow-up, is the Atlas TSV application, when you referenced an example of the synergy between the 2 companies optical x-ray technologies. And also -- the Rigaku relationship sounds undoubtedly, like it's focused on the semiconductor engagement. But given that a large portion of Rigaku's business is also outside of semi, are there any opportunities or plans to engage in markets beyond semis?

Specific to Rigaku, focusing on semi and they also see semi as 1 of their key growth pillars. So I think that's a great synergy and a great reason why working together. We can provide the strength, not just of technologies, but also of our footprint and infrastructures. So I think that's going to be our focus, at least for the foreseeable future and where the biggest benefits will be realized.

TSV. No, that was not part of -- that was homegrown. That was leveraging the capabilities of our Atlas to do some very specific metrology that was previously done by a different OCD supplier. .

[Operator Instructions] It appears there are no further questions at this time. I'd like to turn the conference back over for any additional or closing remarks.

Thanks, Taren. 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 would like to thank you for your continued interest in Onto Innovation. Taren, please conclude the call.

This concludes today's call. Thank you again for your participation. You may now disconnect, and have a great day.

Good day, and welcome to the Onto Innovation Fourth Quarter Earnings Release Conference Call. [Operator Instructions] 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; 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.

Until 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 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 pay hinging on how quickly new clean room 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 1 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 establish 2.5D applications. For new and emerging applications, we are supporting 4 separate customer evaluations of our next-generation inspection systems at the customer's 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 shop by shot adjustments. As a proof point, we are proud to have been awarded orders for JetStep and 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 day. The surface charge metrology technology acquired from semi lab is a powerful solution to this emerging challenge, and we were 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. Semi lab 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 gadolaroun and HBM 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 $1.5 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 Semi Lab 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 semi lab 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 semi lab 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 in 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 semi lab 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 and 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 Semi Lab 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 factory. 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, a 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.

Yes. 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 were being specific with upside on advanced packaging. We're not being specific yet on advanced nodes. Can you talk about from that 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 the 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 in 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 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 a timing for DRAM in the second half. And several of the discussions we're having with customers are tied around VPAs 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]

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 adjust properly sizes, 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 and 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 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 with -- 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 time 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.

So Mike, I think previously when you talked about packaging, you're more talking -- I mean, more narrowly defined part of your packaging business being the AI packaging, 20% more opportunity in '26 versus '25. This time, you talk 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 Jeff being mentioned on earnings calls glad to hear that, and I hope to hear that more often going forward. So it sounds like the litho business has maybe have turned a corner, 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 our lease revenue for quite a while, but what's the expectation for this year?

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 were running samples through for our Pacelab and that the industry which had a tremendous amount of overcap capacity 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 the 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 co-op inspection business and your HBM inspection business, maybe you could help us understand what the -- 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 a amount of capacity being added, it's relatively similar. So I think that -- and the complexities of course, of the 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 coast 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, and 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 want a 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 coated HBM inspection business that you expect to go greater than 30% in 2026.

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 semi lab 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 semi lab, we 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 have initially said somewhere low hundreds to 110 was kind of the revenue. We do expect that power semi, which is a significant portion of their business may, given the market cycle feel a little bit more challenged than we originally thought but certainly have high expectations for.

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

Yes. I mean in Mike's prepared remarks, we talked about WFE in 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 you'll kind of firm up over the course of time and let you guys kind of do the rest of the math.

Understood. That's very helpful.

We'll go next to Brian Chin with Stifel.

A few questions. Maybe circling back to the DPA 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 that 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 a dragon slice I think in HPM yes, so 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 that 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 on some of the new products and applications 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 Yes. So Yes.

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 penetration. 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 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 just 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 around spending in '27 is kind of more of a tailwind for your business?

Well, I think 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 in 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 -- maybe we're just introducing films at that time. So no, it's really all around gate all our apps. It's really all driven by gate all around.

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 would like to thank you for your continued interest in Onto Innovation. Lisa, please conclude the call.

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

All right. Good morning, everyone. Welcome to the 28th Annual Needham Growth Conference. My name is Charles Shi. I'm the semi-cap analyst at Needham. Joining me on stage here is Onto's CEO, Michael Plisinski. CFO, Brian Roberts, and IR, Sidney Ho, are also sitting in the audience. So Mike, once again, thanks for joining me today.

Pleasure to be here.

I heard that we're going to finally have a fireside chat this time. You want to have a few slides to go through first. Stage is yours.

Yes. Thank you very much, Charles. So I just have about 4 or 5 slides just to kind of level set everybody on where we are, especially with this market and what happened during the year. So just to start, of course, the safe harbor, remind everyone what I'm about to share is based on my best knowledge, [indiscernible] subject to risk. Look come up, please.

Now let's go into it. So I think everybody is starting with AI, right? AI is driving our industry right now. You've seen NVIDIA's comments about a 40% CAGR over the next few years. That's all on the demand side. Of course, the supply will be driven for us, will be driven by the expansions of factories, things like this. So super great backdrop for the industry. But what you may not realize is how tied we are directly to that AI supply chain. So if we look at just the 2025 revenue, about 61% of our revenue came from customers directly supporting the AI supply chain. So a very tight tie. And because of that and because of the exuberance or the more positive tone our customers are having in the last few months even, we're starting to see an outlook for 2026, that is about at least 10% stronger in the first half than our second half of 2025.

So that's an improvement over the last few months where we said, yes, it will be stronger, and we kind of implied single-digit kind of numbers. And this is above.

And then above that, we have the SDI or the Semilab benefit. So additional growth on top of that. And we still believe that the second half is going to be stronger than the first half. So now where do we play in that AI value chain?

Several areas listed here. I think none of these are a surprise, but we just wanted to level set everyone. So as far as the gate-all-around, gate-all-around node, we have the strong OCD position. We have growing position in the common films and of course, opportunities to grow in the integrated metrology.

And then you can see throughout these different markets where we're strong, leading in inspection for advanced packaging, of course, the 2D macro inspection leadership with new opportunities now in 3D metrology, which we were qualified at 2 of the 3 HBM memory manufacturers. So good progress there on the 3Di. And you can see right through here.

But I did want to call out the co-packaged optics. Even though it's very small, I think there's really strong demand from the market for bringing this kind of technology online. And there we have a very big position, not in revenue, but in the types of products serving co-packaged optics from Specialized Inspection to Metrology and unique opportunities in 3Di Metrology. And metrology I mentioned first, it's primarily films. So Films Metrology and then 3D Metrology. So great opportunities there.

And then -- and that's all started through, let's say, late '24 through '25. Recently, we've expanded our opportunities for '26, and we're looking at critical films, something we've talked about. We think that's going to be more of a play in '26 with our critical films. Our Iris G2 tool as well as the 3Di metrology, which has been qualified at OSATs, HBM manufacturers and co-packaged optics. So photonics manufacturers. We think that's going to continue to grow into this year.

And then Charge Metrology, something new. That came from the Semilab acquisition. All told, these opportunities add about another $1 billion in opportunity with critical films being the biggest. But let's go into charge metrology.

So this is a new capability that we added with the Semilab. And we talked about covering what synergies we see from the Semilab acquisition, which we'll do in more detail at the next earnings call. But I just wanted to give you a quick view of what this new technology is going to do for us.

So when you think about chiplet architectures, we're involved in everything tied to the interconnects. So the measurement, the printing through our lithography capability and inspection of interconnects. That's what we do today, whether it's RDL, TSVs, bumps, the interconnect technology for process control, we're very strong there. But what's happening in heterogeneous packaging or chiplet architectures is that residual charge. So if you have a die and it goes through some plasma dicing of plasma etch, it can pick up a charge and that charge can stay on the die. Typically, designers have circuitry to dissipate these charges, okay?

But when you're going to chiplet architectures, the designers are saying, no, the package has to have that dissipation because we don't know what kind of chips you're going to be connecting together. So customers like a TSMC have a very big concern about taking these potentially charged die, putting them on an interposer or on another package and then having that charge go through, as you can see here, through the interconnects and damaging the die next to it. And there's no way to measure that, except through this technology. So we think there's a big growth opportunity here as chiplet architectures become more and more prevalent.

The other area is in power semiconductors, not super hot right now like AI, but definitely a secular growth driver, at least in our opinion. Here, for compound semi manufacturing, epitaxial is one of the most critical steps for the process, so for the device. So the epi process aligns the crystalline structures. It's one of the biggest determining factor for the performance of that chip when it comes out through test, at the final stages. So we do a lot of inspection and analytics on the crystalline structures, but we don't know which one is going to electrically fail and the customer doesn't, until the very end.

With this Surface Charge Metrology capability, we're able to actually take our inspection data, feed it into them, into this tool, the charge metrology and measure in those areas for the electrical performance of those chips, of those defects to determine whether or not it's going to be a killer. And that's way upfront in the process. So it's a significant advantage for our customers. So this is another -- I didn't hit the plus. So this is another area of growth with this new charge metrology capability we have with SDI and how it fits in nicely with our portfolio.

Now I mentioned inspection. I'm sure everybody is interested in inspection. What makes the Dragonfly so special? Why does everyone bug me about Dragonfly. Just kidding. So -- it turns out when I made this slide, my own team didn't know why we named this thing the Dragonfly. So in nature, the Dragonfly has the most eyes of any creature in nature, 30,000 eyes and they reflect or they can capture multiple different wavelengths. They have different sections. These Dragonflies have different sections for high-speed acquisition and that kind of thing. So very diverse capability, which for our Dragonfly is very similar.

So the Dragonfly capability we have today is much more than 2D inspection. Over the years, we've added a tremendous amount of sensors, that solve a variety of applications for customers, both known and unknown. So applications that customers didn't realize they had until they start processing and ramping and then say, [ holy moly ], we don't know how to measure under-fill. And how do we get this data? Well, we have three different sensors. When you combine those data streams, we can give them exact accuracy for that. So you can see here the number of new applications that we added in 2025 just on the Dragonfly G3. So pretty powerful, pretty compelling, and that's why we've seen less of a loss or less of a drop in the Dragonfly business as we expected at the start of the year.

Now everybody is probably interested in update on the new Dragonfly platform. So this will preserve all of the sensor capability that we had before, but significantly enhance our resolution. And it's a ground-up system. You've heard me talk about on earnings calls, literally from the platform it sits on, all the way up, the vibration isolation. And you can see here -- the slide is a little off. But you can see here the performance improvement over the prior generation.

So significant improvement in both throughput as well as resolution. So those ovals show you the resolution, where it is in a resolution perspective, lower is better and where it is on throughput, okay? I can't do that. And then the competition, so we get a lot of questions around the competition. The competition is somewhere in between that. So when you think, is this a me-too product line? No. It was designed to go after front-end applications. It was designed to be significantly more than what the packaging market needed because frankly, a packaging market didn't need it, some 18 months ago. And so we have a pretty compelling position here.

The other thing everyone is asking is, did we ship the tools we said? Yes, we did. And in fact, we now have a purchase order from a fourth customer that we expect to deliver in the quarter -- in this quarter as well as several other systems that we expect to ship in the quarter. So already, we're seeing some significant traction on this new platform based on its capabilities, et cetera.

One more. I know you're anxious to grill me. Last slide. So we talked a lot about revenue, about growth, about opportunities, but we haven't lost sight of the fact that we have significant opportunities to improve our operating margin and starts with gross margin, goes right down to the bottom line. We've done three things to do -- to help improve that.

The first is the extended factories. So we talked about our move, our very aggressive move to shift manufacturing over to our Asian partners. We've achieved -- I think we said in the last call, about 50% of our production is now overseas. Target is around 80%. We should be able to achieve that mid next year, or mid this year. So in the next few months, next 2 quarters. So very good progress there. We're at the point now where all products are being built over there. So now it's a matter of optimizing and ramping the suppliers, and it's going quite well.

The other area is the -- because of these new products, these new applications, we're able to deliver more value for our customers and, of course, share in some of that value creation. So we have higher margins on the products, on the new products coming out. And then we've always said that the SDI benefit, the Semilab benefit is margin accretive out of the box. So both from an operating -- from a gross margin perspective as well as an operating perspective. All told, without counting any of the increased benefit from growth in our core products, these three areas will result in at least a 30% improvement in our operating margin, in our earnings, net income for next -- for this year, 2026. And that is my last slide.

All right. Thanks, Mike. All right. Let's go back to one comment you made, 90 days ago. Yes, a lifetime away. You said 20% more AI packaging tool opportunities, but you were characterizing that 20% as its initial discussion. And over the last 90 days, do you see that 20% more packaging tools, AI packaging tools, that discussion has turned into firm orders. And are you ready to raise the number, maybe too higher?

No. So we just shipped the tools. They need to be qualified, then we can raise. So the discussions were around potential needs, helping us to make sure we had our supply chains ready to be able to deliver, what could be expected. 3 months ago, we were talking single digits for first half growth.

Obviously, we're seeing some significant improvement to that. So you can assume that there might be some benefit there on the packaging side. But we wouldn't change any of the numbers until we get through the qualifications, which are 3 to 6 months. We have to look at the ramp timing. Those are also changing, and we need to look at those insertion points.

Great. Maybe go back to the other thing that the first half of '26 versus second half last year, that single-digit sequential half, not exactly half-over-half, but sequential single-digit growth, now you're expecting 10% plus. Some of that is packaging. What's the other part? What's driving the other part of the raise?

Yes, Advanced Nodes. So it's primarily Advanced Nodes and Packaging. So I don't have a breakdown, but I know gate-all-around was certainly a big one. We've seen some spending there. Packaging from HBM perspective, the Dragonfly demand is strong. The HBM orders we talked about from a 3Di perspective, one of those customers, we've gotten the BPA, so we have some visibility now. The others we're working on still. So I think the growth we're talking about is pretty much uniform but still driven a lot by AI, both front-end and back-end.

Got it. So maybe we'll touch upon each of the elements you just mentioned. Let me start from the CoWoS. As I understand that the Dragon G5 qualification is very important. Can you kind of remind us where you are? I think you mentioned something, but it's more at a higher level, you talked about the fourth customer, but we specifically would like to know what exactly at the leading foundry, where the qualification has been going on and what's the next milestone and...

For CoWoS?

Yes.

So what we've said publicly is 3 to 6 months, which is a pretty accelerated qualification period driven by the customer. We won't share any details beyond that now. But internally and with the customer, we've worked through the exact timing, the exact layers, the exact specifications they want to see demonstrated in order to prove out our process. So that's going to all add up to be in that range we just talked about. In each earnings call, we'll be able to provide clarity as to our progress through that. Hopefully, we're on the earlier end of that, but 3 to 6 months is the comfortable place to be.

So still some part around the middle part of this year?

Yes, we should be through those qualifications by the middle part of this year, if not sooner.

Is it fair to say that the 20% AI packaging opportunity, you will be more comfortable committing to that number once the qualification with this particular customer is done?

Yes, that would be a very fair statement to say.

Okay. The other interesting development, right, around CoWoS is OSAT. The 2 OSATs seems to be building out more of the CoWoS, more involved in CoWoS. I know you guys started talking more about the OSAT side of the AI packaging business. Can you kind of talk a little bit more about where -- what's your market position in OSAT, the 2 OSATs, leading OSATs? And what's the -- how do you feel about the growth of the OSAT business, particularly in AI packaging this year and maybe even a little bit longer term?

So I think -- there's a couple of areas there. So there's the outsourcing of capability from TSMC to the OSAT. So TSMC can focus on areas that they're going to consider more profitable, so some harder areas. That's driving some growth.

And then there's the, let's say, other customers of TSMC that don't feel like they're getting enough attention, et cetera, et cetera, and they are looking at some OSATs to pick up some packaging capability. That drives another piece, and that's some different technology.

We're benefiting from both given that we're a strong 2D supplier to the OSATs for decades. The strength of our tools is generally more on the high end. And all of these examples I just gave that's driving OSAT business today are high-end applications. So the higher resolution, the higher precision, the capabilities of Clearfind, et cetera.

In addition to that, we talked, I think, 2 quarters ago, maybe last quarter about being qualified now and getting volume orders from OSATs for 3D metrology. So bump metrology, which we didn't have before. That was typically a competitor's area of strength. So the new 3Di is proving compelling, not just for the high-end latest HBM applications, but also for OSATs. And that's based on its throughput and the fact that we can add it to our Dragonfly and provide a complete total solution.

Stay on logic for one more question. One area, I think you guys have talked a little bit less, I would say, over the last year was the lithography the panel level packaging lithography. Your JetStep system. But we're always still paying a good amount of attention to that particular area because your indirect customer, as they go through their transformation, their turnaround, we think it's probably going to be a little bit more positive this year and maybe going forward.

And especially, we're hearing more about EMIP getting more of a traction among the [indiscernible] for AI packaging applications. So mind if you walk us through like where you are? Where you -- how you think about the Litho business and maybe not just the litho, maybe Dragonfly business, in at that particular customer directly or indirectly as well?

We won't speak specifically to one customer because they tend to get mad about that. But what we'll say is that from a litho -- well, from a process control perspective -- let me step back.

From a panel perspective, for sure, we see the markets heating up. We see a lot of excess capacity that had been there for 3 years starting to be taken up, and we're getting much more traction with customers looking at, let's say, funded investments now versus theoretical investments. So that's a positive. Since then, so in the last 3 years, we've also seen customers recognize the importance of in-line process control. So as the panel market has evolved and gotten more sophisticated, moving down in lines and spaces, the need for in-line process control and the capabilities of Firefly, which was significantly more expensive than their existing tools, which they just used for a spot check at the end of the line. That's become more critical.

And we're seeing the metrology capabilities on the Firefly, like those sensors we talked about as more interesting to them even than the inspection. So there's a lot of opportunity in panel for both our process control as well as the JetStep Lithography. So what makes the JetStep so interesting?

JetStep with its very wide field optics is able to handle large packages without any stitching. And that's a key, key point for our customers. The other advantage and which makes it so expensive is the wide field optics are also very high resolution. So near 1 micron resolution, printing image resolution. So that's unique in the industry. No one has that capability proven and delivered. So that's an area that our PACE Lab has been really doing a great job, bringing in customers to run samples, to learn from the partners we have there as well as our own equipment there, both in the substrate as well as glass, which glass we didn't talk about, but that's the next evolution or maybe the first, we'll see. There's kind of two camps there. But for sure, we see the panel growing in opportunities. Enterprise servers are where they came from, but we're seeing AI opportunities -- AI-driven opportunities from our customers as well.

So you talked about over the last 3 years, right, the excess capacity was built probably during COVID for the panel-level packaging, advanced substrate that side of the business. Where do you see today in terms of that capacity digestion? Are we closer to a point maybe the demand could pick up in the next 12 to 24 months?

Yes, definitely 12 to 24 months. Based on the conversations we have with customers, there's real plans from -- now remember, the lead times are long on the steppers, which is good. But there's real conversations happening for funded expansions, not hope -- happening now. So actually over the last 6 months. And hopefully, we'll start to see those discussions turn to firm orders and then expansions into next year. This year will also be okay.

Got it.

But Firefly is the kind of upside. That's a tool where we're gaining a lot of traction. It's much cheaper. So it's easier to bring in. They can apply it to their existing lines, including R&D and pilot. And again, the recognition how important in-line process control is to these customers is becoming eye-opening.

Got it. So maybe let's talk about memory. I think the memory, it's two things for you, right? One is HBM packaging. It's the other is the front-end, the DRAM. And also, I would like to talk about NAND as well. First on HBM packaging, I think you were relatively early to call, a little bit of a capacity overbuild. I think you caught that last year.

That helped us.

What's your view right now? Are we nearing the end of that digestion or still some way to go?

So everyone knows that part of that digestion was tied to Samsung. So you can look and see if Samsung has been qualified by NVIDIA, who's driving the biggest lion's share of HBM adoption right now. And Jerry is out. So you hear multiple comments around that. I'm convinced that, that will happen.

So that will happen. Those tools will get digested or utilized. And Sydney has highlighted the ASIC guys are getting more aggressive. They can win some business there. It's not all tied to NVIDIA. So -- and Samsung is well positioned for some of that. So I think we'll see that occur. But based on the discussions with the HBM customers, I think there's meaningful levels of expansion, at least at the other two that suggests we should see a nice year of growth in 2026.

Great. Growth. That's what we want to hear.

And you asked about the front end. Did you ask about the front end?

Not yet, but please. The DRAM and NAND the front-end business, Advanced Node business. Where do you see them? I think you mentioned about clean room constraints, but what's the current projection right now? When do you think the business could pick up again?

The reason why I said again was, I believe, first half of the year, memory was great, then roughly in the summer got a little bit quiet, then come back a little bit again towards the end of the year. So that was the trajectory of your Memory business, especially on the DRAM side, right? What do you think how this year will play out for DRAM? And then maybe I'll ask you about NAND as well.

I think from what we're seeing, it will be more second half kind of mid- to second half weighted based on factory expansions, et cetera, on the front-end side. For HBM, we're already seeing demand growth there. The question really is around the magnitude. So when you look at these big numbers, about 40% CAGR, 20% growth EBITDA, then you kind of bring that down to how much factory space is available and you start to say, geez, it can't grow that much. There's just not enough capacity out there.

That's what we're working with customers on now trying to understand. They're looking also how we free up, how do we reallocate, et cetera. For us, any expansion is bigger now than it was as we've added more common films, the OCD has always been very strong. So there's a very high position there. But we've added more common films. We've added more integrated metrology, so higher share, more applications there. So any spending there should be outsized benefit to us than it was certainly 2 years ago or even last year.

Got it. Let me ask you about China. Your China exposure is relatively light compared with almost all your peers.

I noticed.

But it's probably good in one way, but it can be bad in the other way. Like good in a way, like it provides protection against geopolitically driven policy volatility, let's say. But we want both things. We want protection in bad time, but we want you to be participating in the upside in a good time. So how should we think about your China business? I think you started to talk a little bit more about China, but can you give us a little bit more light how you plan to grow?

So I think there's two new elements to the strategy. One is the addition of the extended factories. So by moving manufacturing outside the U.S., we've significantly de-risked ourselves in the mind of our Chinese customers. And so we've seen a much deeper engagement from the executives, even visiting our PACE Lab and looking at how they can expand with us. And in fact, one of the executives that visit us made a comment, why haven't we been buying from you? It used to be our best customer. You tell me.

So I think that, that's going to be a positive side benefit of moving overseas. The other piece was the SDI. SDI has a pretty strong position in China manufacturers. Some of them are different than the customers we had. So we'll be able to leverage those installed bases to bring in some of our additional products and offer a broader portfolio to the customers in China. And because the -- especially the surface charge metrology is so unique, you can only get it from us, that's going to be a great door opener, just like echo the old [indiscernible] was.

All right. I think let's take some questions from the audience, please.

Very interesting presentation. Can you talk to so given the tight capacity [indiscernible] that you obviously bring tremendous value. So can you talk about how they quantify the value you're bringing and what -- how you think about the price increases that you can justify to them?

Allow me to repeat the question for the webcast. So the question is about the value, how you quantify the value you're providing to areas like HBM and are you able to raise prices?

So great question. It all comes down to step one, can you see and solve the problem that they're having. So can you see the defects of interest? Can you make the measurements that are critical to them? And then if you can and do it reliably and repeatably, then the question is, can you do it with a better COO? And COO is going to be a price and a speed, the combination. So that's where we typically have a good advantage.

So we might not be the cheapest price, but we can be much faster. And the new Dragonfly G5, if you saw it, it's almost double the speed of a G3. It's a significant improvement over G3. And its sensitivity goes down. So we can see much more. Plus we have all those other capabilities, those other sensors. So I think in that case, that's -- in the case of our metrology, the Iris platform, the critical films, it's a matter of making that precision, but then we'll be hopefully faster, but definitely at a different price point than their alternative today. So the COO will be much better.

The older version of Dragonfly [indiscernible]...

We've said it will be a meaningful improvement to margins. So between price and COGS.

One last question, please.

[indiscernible].

What's the key differentiation that you think is sustaining your advantage?

Yes. I think it's understanding the customers, the markets. I think it's the -- because of that understanding, we know a lot of the challenges they have beyond the simple inspection piece. That's one lane, but they have many lanes they have to address when they're trying to release something through packaging, through the final steps. So I think that's one of our advantages. 2D inspection has been an advantage. With this new platform, it will continue to be an advantage.

So one of our competitors has a tremendous breadth in 2D inspection, tons of technology. A lot of it's not as applicable to a packaging world. And where we need to go, we understand. So the next step after this, we're already working on. So I think we have pretty high confidence and it's not going to go down to 10-nanometer needs and packaging, but all the filtering out noise, dealing with high warp, dealing with crack, all these things are different problems that need to be solved from the same tool. That's, I think, a strength of ours. And customers want to work with us, and they want to see an alternative.

All right. Thanks, everybody. That's the end of the session. Thanks, Mike.

Thank you very much, everyone.

Good day, and welcome to the Onto Innovation Third Quarter Earnings Release Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Sidney Ho. Please go ahead.

Thank you, Rachel, and good afternoon, everyone. Onto Innovation issued its 2025 third quarter financial results this afternoon shortly after the market close. 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 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, Michael Plisinski. Mike?

Thank you, Sidney. Good afternoon, everyone, and thank you for joining us on our call today. Underpinning our financial results, which came in ahead of the midpoint of our guidance ranges, the Onto Innovation team made excellent progress with our strategic initiatives, including new product adoption, advancing our offshoring activities and preparing for the close and successful integration of the Semilab transaction. We expect each of these efforts will enhance our leadership position in the exciting advanced packaging and advanced nodes markets and strengthen our outlook for growth in 2026.

Market growth in 2026 is likely to include increased investments in advanced packaging to support the strong demand for AI compute. So we are very pleased to announce that our 3Di technology has successfully completed the full qualification process at not one but two high-bandwidth memory customers in the quarter. Our 3Di technology demonstrated superior performance on smaller denser 3D interconnects, critical for next-generation devices. Following these successful qualifications, we started discussions for volume orders with integrated 3Di and subsurface defect inspection to support next-generation HBM devices.

Another win for the 3Di in the quarter was an order from a leading OSAT to support 2.5D applications for AI packaging. To support advanced 2D inspection applications -- the launch of our next-generation Dragonfly system is progressing well with the first shipment expected in a few weeks, followed by additional systems in December. After last quarter's optical performance validation by a key customer, we have since completed successful in-house wafer studies for high-bandwidth memory and hybrid bonding applications leading to several more evaluation shipments to customers in the first quarter. In fact, the success of these demos has several customers adding the new Dragonfly to preliminary discussions on volume needs for 2026.

Turning to advanced nodes. We remain on track to deliver a record year in advanced node revenue outside of China. Contributing to this performance is the growing adoption of our Iris films and integrated metrology platforms, both on track to set records for the year. Looking at the markets broadly, recent headlines continue to reflect strong and sustained demand for AI and high-performance compute. NVIDIA projects that global AI infrastructure investments could reach $3 billion to $4 trillion by the end of the decade, potentially reshaping the semiconductor supply chain.

At the core of this evolution, our new memory and logic transistors and packaging architecture supporting chiplets for logic, 3D stacking for memory and nascent copackage optics, all designed to increase device performance while lowering power consumption. Onto Innovation continues to play a pivotal role by working closely with our customers across this broad value chain to develop and deliver the process control solutions required to support this AI era.

In the immediate term, we expect revenue growth of approximately 18% at the midpoint of our Q4 guidance range. The greatest contributor to this growth is from 2.5D packaging customers where we expect revenue to nearly double from the third quarter, driven by strong Dragonfly system demand. We expect advanced nodes revenue will also improve with increases in DRAM and logic spending.

While discussions for capacity needs in 2026 are in early stages, our packaging customers are indicating the potential need for as much as 20% more tools to support expansions and new applications for our 2D subsurface and 3Di inspection technologies. While quarterly performance may show variation, we expect sequential growth in the first half of next year with more meaningful growth expected in the second half of 2026, driven by increased contributions from new products and potential capacity expansions.

Supporting this growth is our aggressive ramp of our extended factories in Asia, and I am pleased to report in the third quarter, we successfully shipped over 30% of third quarter tools from these factories. Thanks to the incredible efforts of our operations team and supply chain partners, we are now on pace to be capable of shipping over 60% of our production demand from our international locations by the end of the first quarter of 2026. These efforts will enhance our competitive position, mitigate tariff impacts, provide greater manufacturing flexibility and allow us to expand gross margins in 2026.

Finally, a brief update on our pending acquisition of 3 complementary product lines from Semilab. In October, in response to a second request letter from the Department of Justice, we amended the transaction to exclude a relatively small product line. We currently expect that the transaction will close in the coming weeks and be accretive to both revenue and earnings in 2026.

And with that, let me turn the call to Brian to review our financial highlights and provide fourth quarter guidance. Brian?

Thanks, Mike. Good afternoon, everyone. Third quarter performance met or exceeded expectations across key financial metrics as we work to improve our forecasting processes and implement more disciplined spending controls. Revenue for the quarter was slightly ahead of the midpoint of our previous guidance range at $218.2 million. Gross margin for Q3 2025 was 54% and includes approximately a 1 percentage point impact related to tariffs.

Operating margins of 21.1% exceeded the top end of our guidance range as we maintained our focus on variable cost control in the quarter.

Finally, adjusted earnings per share for the quarter were towards the high end of our guidance range at $0.92. And the market level for the third quarter of 2025 and advanced nodes generated revenue of $54 million or 25% of revenue as DRAM and NAND revenue decreased as expected, sequentially from the second quarter. For the full year 2025, advanced nodes revenue is expected to double to approximately $300 million as compared to $148.5 million in full year 2024.

Specialty devices and advanced packaging revenue was $113 million or approximately 52% of revenue. A strong rebound to approximately $150 million in specialty device and advanced packaging expected in Q4. Revenue for this market should finish slightly higher than $500 million for the full year. Software and services revenue of $51 million comprises the remaining 23% of Q3's results.

The team did an outstanding job generating cash in the third quarter as cash from operations increased sequentially to $83 million from $58 million in Q2. This represents cash conversion of approximately 185% of our non-GAAP net income in the quarter. Given the pending acquisition of Semilab, we did not repurchase shares in the third quarter. Once the acquisition closes, which is expected in the coming weeks, we will pay Semilab $432.3 million in cash and issue 641,771 shares of our common stock. The value of the total transaction based upon Onto's closing price as of June 27, 2025, is approximately $495 million, a decrease of about $50 million from the original terms of the deal.

Now turning to our outlook for the fourth quarter. Revenue is expected in the range of $250 million to $265 million, representing 15% to 21% sequential growth. As Mike noted, the majority of the Q4 increase is expected to be driven by strength in advanced packaging with more modest improvement in advanced nodes, specifically around DRAM and logic. At the midpoint of the revenue guidance range, we would expect to achieve approximately 50 basis points of sequential gross margin improvement in Q4. Our Q4 gross margin expectation also includes an anticipated percentage point impact of tariffs or approximately $2.5 million of cost, primarily due to inbound tariffs on raw material imports.

Operating margins for the fourth quarter are expected to rebound to a range of 24% to 26%, on operating expenses of approximately $77 million. The fourth quarter, which will officially end on January 3, 2026, includes an additional 14th week, given the company's historical fiscal closing structure. The impact of this extra week is approximately $3 million in incremental operating expenses in the fourth quarter, representing approximately 120 basis points of operating margin.

Starting with the first quarter of 2026, Onto Innovation will switch to a quarterly calendar schedule of March 31, June 30, September 30 and December 31. Earnings per share for the fourth quarter is expected in the range of $1.18 to $1.33 per share, assuming an estimated tax rate of approximately 13% to 15% and about 49.4 million shares outstanding. As a reminder, we are not including the pending Semilab transaction in our current Q4 guidance.

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, we've made great progress on key initiatives that will position us for growth in the coming year. On the product front, we plan to ship our next-generation Dragonfly system in the coming weeks to a leading AI packaging customer with several additional systems slated for memory customers in December. Our 3Di technology has now been validated by 2 leading suppliers of high-bandwidth memory and adoption is expanding across a broader customer base.

From a broader market perspective, the long-term outlook for AI and advanced node investments continues to build, driven by aggressive infrastructure expansion plans globally over the next several years. With our differentiated product portfolio and technology leadership in advanced nodes, advanced packaging and specialty devices, Onto Innovation continues to be well positioned to serve our customers and capitalize on these secular trends. We expect to see organic growth in 2026 with momentum building toward the second half of next year.

And now, Rachel, let's open the call for questions from our covering analysts.

[Operator Instructions] And we will take our first question from Craig Ellis with B. Riley Securities.

Yes, and congratulations on the good execution guys. I wanted to start, Mike, just by following up on your most recent comments regarding organic growth through the year. Can you comment on what you'd expect for your 2 big segments, advanced packaging and advanced nodes? And any color on the linearity with those businesses.

You mean for 2026?

For 2026, yes.

Yes. So I think it's a little early to provide especially linearity quarter-to-quarter kind of view. If we look at first half, second half, we think the first half is going to be sequentially better than the second half of 2025. So we do expect growth in the first half with more significant growth in the second half, driven by several different expansions that our customers are talking to us about as well as the impact from the new products coming online, being more widely adopted, let's say, getting cut into volume production. So that would be the 3Di, and it would also include the Dragonfly -- the new Dragonfly system.

Yes. Nice to see on the new products. And then the second question is for Brian. Brian, as we look at gross margins next year, can you just help us with some of the gives and takes? Tariffs have been in gross margin, but when can that come out? And how should we look at some of the other gives and takes with that line item?

Sure. On the gross margin front, I mean, I think we'll start to see the tariff impact start to mitigate next quarter. Keep in mind, most of our tariffs are on inbound and so they sit in inventory for a quarter and then they start to come out. So as we continue to ramp up expansion of the offshore extended factories and more tools are going from there and supply chain is going right directly to those factories, we'll start to mitigate the tariff risk.

I think as we go through the transition to extended factories, we'll see a little bit more meaningful gross margin expansion as we get towards mid and the latter part of 2026. But we're certainly poised to have a good solid year of gross margin expansion.

Got it. And then lastly and somewhat clarically, once Semilab closes, do you plan to host another conference call? Or how will you update us once that's done?

My expectation is we'll just update you as part of the next earnings call. I don't think we'll provide an update right after close. We're going to take a little bit of time meeting with the team, having some more detailed discussions and then provide a more informed view of the business probably in the next earnings call.

And we will take our next question from Ezra Weener with Jefferies.

First one would be about your commentary on 2.5D packaging. You talked about sequential growth into March. I just want to make sure I heard that correctly, you weren't talking about the entire business. And then the other sequential question would be, when you talk about sequential growth in the first half, is that half over half or quarterly sequential growth?

So when I mentioned sequential growth was half over half. So second half of '25. We would -- first half of '26 would be sequentially stronger than second half of '25. And I'm not sure the 2.5D question on what was your question there?

You had talked about sequential growth immediately after 2.5D packaging. I was wondering if that comment had to do specifically with 2.5D packaging.

No. It was -- yes, mainly just, I think, AI packaging is primarily driven by our -- I think that was about Q3 to Q4, driving growth, and it's primarily due to the AI packaging and strong demand for Dragonfly systems.

But the sequential growth -- sorry, the sequential growth in the first half of '26, we were talking about the entire business, Ezra.

Understood. And then the second question would be, with the understanding that you might not see revenue until the second half from the new Dragonfly. Can you talk about the ecosystem between now and then and the timing of when you would see revenue from that?

I didn't say we wouldn't see any revenue. It's very possible we'll see revenue in the first half. It's just going to be onesie, twosies until it starts shipping and volumes, larger volumes. So second half will be more meaningful. But I would expect to convert some of these early shipments in -- as soon as the first half.

And we will take our next question from David Duley with Steelhead Securities.

Regarding the qualification of the 3Di tool at 2 HBM customers for bump inspection, is that tied to the ramp of HBM for? And are you going to be the first source or the second source there?

Well, we're not aware of anyone else being qualified through the stringent tests yet. So our hope is first choice, however you worded that. But I think the -- it is tied to an HBM 4. We've been working with customers on other ways to do even existing processes that would provide a better yield impact. So applying the 3Di technology that we supply in different process steps, which would allow for some level of rework that would help the customers if they do detect any issues to rework it and then drive some higher yields. That's something that only our tools can do, but it's a very new capability. So customers are working on what's the true impact of that across their process. Do they want to make the change now in existing processes or only in the forward-looking.

Okay. My second question is more of a clarification. I just -- I wanted to make sure I understood everything you said. So as far as the Dragonfly goes, you're going to start to ship the new tool to your primary customer that you've lost share with over the next couple of weeks. Could you maybe just rerun everything you said about the Dragonfly so I get it right?

I have an entire script on the Dragonfly. So I believe what I said was we'll be shipping Dragonfly to a 2.5D logic packaging customer in weeks. So that's one. And then I said that Dragonfly -- additional Dragonflies will ship in December, primarily to memory customers. Then I said that in the first quarter, based on the successful demos we've done in the third quarter, we are shipping several more Dragonflies. So we've already increased the number of Dragonflies we intend to ship.

Okay. And it's not just a one customer, it's multiple customers.

Correct. Yes. It's the multiple customers. Yes.

And then final question for me is, as far as your core inspection business with HBM, do you think that's going to be a growth factor in 2026 or has it started to turn on with the ramp of HBM 4? Or how should we think about that?

I think where the customers are also still trying to figure that one out. So for sure, from their perspective, there's going to be some growth. What it means for the process control is not completely clear yet. Customers are working on their allocations, what they spent on process control in the prior year, how much can be reused, do they adjust sampling plans, et cetera. The normal things they always do. So that's the discussions we're having now with customers.

I would say the real good, strong takeaway though is the positions of our tools are demonstrating unique capabilities or the next-generation devices. So as customers start to bring those next-generation devices into more higher volume, primarily in the second half of next year, we should see an outsized positive impact from that.

We will take our next question from Matthew Prisco with Cantor.

So I guess, first one, I'll stick on Dragonfly. It seems like making good progress in the quarter. So kind of after you shift these initial valuation tools, what milestone should we look to from here? And how should we think about the timing of customer adoption decisions both at TSM and all these ancillary opportunities? And then the transition from those adoption decisions to revenue? How quickly can those kind of start shipping for production?

I think it would be reasonable to assume second half. In fact, we said that in the second half, we would expect to see more meaningful revenue from the new products that we're shipping. So as we're qualifying, and that's the good news about shipping to a variety of customers, we're getting those qualifications started such that they're also intending to try and ramp into the second half to cut these technologies into the second half. So as long as we continue to execute, as long as the tools perform as well as they're demonstrating now, yes, I would expect, like I mentioned earlier, incremental revenue in the first half, that means closing out some of these initial tools with more meaningful revenue in the second half tied to the volume adoption that cut into production.

That's helpful. And then maybe going to that 3Di, these new qualifications. Can you kind of give some more color on what drove the win there? How you're seeing your competitive positioning in that technology today? And then how do we think about the translation of those wins to the P&L and potential magnitude of impact there?

So I don't think there's this huge, big jump into the 2026 for the 3Di. There will be an incremental improvement, and then we'll see a bigger impact even in 2027. By incremental, I mean, tens of millions of dollars will be driven by 3Di. So -- now why is -- why are we winning? Why is the 3Di so important? There's a couple of things going on. One, in the last call, we talked about several -- well, let me start with the technology. The technology is differentiated and that it uses the laser base coherent light. Coherent light allows us to focus it in between the dense smaller bumps. And we can do that at a throughput and with the precision that the customers require, which is extremely stringent as they're moving from HBM3, 4E and beyond. That's one thing. So that's one of the reasons we've won those 2 qualifications and it was obviously a very stringent evaluation period.

The second is because of this capability, where the technology and what it's providing, we're opening up several new applications. So -- actually, at least 3 new applications. One is the one I described earlier, where we can potentially apply 3D bump metrology at a different step in the process, which will allow customers, let's say, to do some rework and provide a better yield improvement. That's one. Two is there's 2 other new applications where the technology has a speed and the precision to provide other types of metrology across surfaces. So across die, warpage metrology as well as some specialized metrology for 2.5D packaging.

And we will take our next question from Brian Chin with Stifel.

Maybe first, just to follow up on the 3D discussion. From the sounds of it, this sounds like it's the pre-reflow bump metrology step, Mike. Is that correct? And -- is this an additional or new metrology step for many of these adopters?

Correct. And it is a new metrology step because previous technologies couldn't reliably measure at that pre-reflow step. The light would scatter too much is what we're told.

Okay. And would you expect -- in terms of the amount or the metrology time required kind of post reflow, would that kind of potentially decrease that?

I think you would eliminate. So you'd be -- the customers, their intent and our discussions are around shifting the metrology to pre-reflow, so you don't need to do a post-reflow. There's a strong correlation there, but you have the ability to rework.

Got it. And then for a follow-up question, kind of weaving in sort of, again, your view of advance to WFE markets as well as advanced packaging. Q3 this year kind of a low quarter. You're up in Q4. And so sequential first half versus second half, it's helped by that kind of low 3Q. But when you kind of think about whether the quarters without giving a specific quarters, 1Q, 2Q, whether they'd be kind of linearly up or there could be sort of up or down. What are the kind of the key swing variables you're looking at around either advanced packaging, coos investments, maybe also kind of changes in sampling plans for use, et cetera, and also advanced nodes, where there does seem to be some pickup now in the DRAM side of that spending? And maybe you can even kind of like even advanced foundry front-end spending. So kind of all the kind of variables that you think about in terms of how the revenue could trend in the first half next year.

So I think it really depends on the customer spend plans.

Right? So -- and that's always the case. That's why I'm struggling how to answer it. a lot of customers are opening and have spoken about factory expansions, but most of them are going in for second half. We, of course, get process control systems in early. So we get in, let's say, in before that the larger WFE starts to rise and pick up from that. So -- and that's normal process control spending patterns. That's one.

On the AI packaging front, there is some level of capacity digestion, process optimization, that's both positive and negative. So some of it is, hey, because of the challenges with the new technologies, some of it is tied to, hey, we overbought in one area. We need to optimize some processes there, but wholly macro, we have struggled in another area. And we need the new technology. So some of these 3Di applications, I mentioned, are new technologies. Some of the subsurface applications are new where we're seeing a lot of demand are for new applications. So it's very hard for us to quantify that. And that's why we said there could still be -- so to answer your question in one way, we don't expect linear. We do expect some variability quarter-to-quarter. It's kind of natural. But the secular trend, we think, is positive, and we also think we're well positioned.

And we will take our next question from Edward Way -- from Edward Yang with Oppenheimer.

Just to clarify on a couple of numbers, the tens of millions of 3Di you're talking about, that's for 2026, correct? And I also heard you say something about shipping more tools. Was that related to AI packaging?

Correct. Yes. And it's based on initial discussions. So the early indications -- kind of going back to Brian Chin's question, we're getting early indications of a certain level of demand, but that can change. And we're still in the early stages of discussion. So it's really hard for us to provide any kind of real guidance on that. But the 3Di, correct. That was for 2026.

And the 20% more tools comment you had in the script?

Is for primarily AI packaging. Correct.

Okay. And that would account for the fact that you wouldn't be shipping or recognizing much revenue from your new high-res Dragonfly G5 tool until the second half of 2026, right?

Correct.

Okay. Wonderful. And could you just comment or provide your thoughts on the tightness and the strong pricing your customers are enjoying in memory markets and how that might pertain to 2026? You had a $69 million DRAM VPA starting this year. Does that cover this current market strength that you're seeing in those memory markets or do you expect more orders coming down the pipe?

I believe the existing VPAs covered this year, and I believe we've worked through those. I don't think there's any -- we've had actually a pretty strong year in advanced nodes. So I believe most of that is already covered. And the discussions we have now are all new VPAs for next year and slightly beyond.

Okay. And my follow-up would just be on Semilab again. On the amended terms, were you surprised that regulators had wanted some scrutiny around that? And could you just provide your updated confidence in approval with the changes that you made and the timing on that?

Well, since it's not closed and not wanting to ruffle any feathers from potential regulators, I will say, yes, we were surprised, but we worked cooperatively with Semilab team, with everybody to find a very reasonable solution.

And we will take our next question from Vedvati Shrotre with Evercore ISI.

The first one I wanted to understand was the first half '26 sequential increase that you talked about, like where do you have the most confidence advanced node versus packaging? Like is one doing better than the other? If you could give any directional sense on that.

I think I actually don't have the numbers in front of me, but my impression is that it's probably advanced nodes in specialty devices continuing to show some strength. Advanced nodes also okay, but advanced nodes, many of those factories are second half. So I think that will be much stronger in the second half.

So sorry, banking nodes will be more stronger in the second half, is that...

Yes, I think -- so basically, the advanced packaging segment advanced packaging, specialty device, probably coming out in the advanced nodes in the second half. But again, as Mike has kind of pointed out, a lot of those discussions are still early days as we work through the exact timing of spend with customers and all of those pieces.

Understood. Okay. And then I think last quarter or the whole of this year, you sort of had that view that one of the HBM suppliers isn't qualified and that's kind of limiting the visibility you have on HPM progression. How has that conversation changed last quarter versus this quarter? Has the visibility gotten much better now that the demand dynamics have changed so significantly for the memory supplier?

Well, I won't -- the visibility is improving for -- with regards to our discussions with the suppliers, but the who's been qualified and who's -- what the allocations are? I'm not so sure that, that visibility has gotten much better.

Understood. Okay. And then the third thing I kind of wanted to understand was, if I sort of take the larger caps, like the land, not necessarily your competitors, but a lot of them are already seeing like strong quarter-on-quarter growth on HBM and DRAM of like fourth quarter versus third quarter. Are you seeing any of that?

First, you mean in the fourth quarter?

Yes.

In the fourth quarter, yes, we mentioned that we are seeing strength in the -- well, more of our -- yes, strength in the memory. Yes, DRAM. DRAM then some logic. Obviously, NAND is still very weak.

And HBM is muted. Is that kind of fair?

Well, then HBM goes to the packaging side. In packaging, I think we've just -- we mentioned that it's an extremely strong growth from the AI packaging side. I think we said almost 50%.

Right. So the packaging growth, my interpretation was most of it was driven by essentially your OSAT plus kind of the foundry logic piece growing. Does that have APM element in there as well?

For sure, HBM as part of our Q4 forecast is it driving most of the growth, I mean I didn't break it all down into that, but it's for sure AI packaging, and that includes HBM.

[Operator Instructions] And at this time, we have no further questions. I would now like to turn the call back.

Thanks, Rachel. 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 would like to thank you for your continued interest in Onto Innovation.

Rachel, please conclude the call.

This does conclude today's call. Thank you for your participation. You may now disconnect.

Good afternoon everyone. Thanks for joining us today. My name is Elizabeth Sun and I'm with the semiconductor equipment team here at Citi Research. And in this session, it's my honor to have Mike Plisinski, CEO of Onto. Welcome, Mike.

Thank you.

I have a list of prepared questions. And -- but for those in the audience, if you have any questions, feel free to raise your hand any time. So first, Mike, I'd like to start with a high-level question about the market outlook. What's your view on the end market growth into next year across various segments you are in, both on the front end and back end? It's a big question.

Everybody always wants to know that. So I don't -- I think it's too early for us to have a very informed view of 2026 right now. We're still talking to customers. We're actually starting the process of engaging with customers on their expansion plans for next year. They're talking to their customers, what demand drivers look like. So we'll know more towards the end of the year. But for us, we've never really that obsessed with where is WFE going and where that overall market is going. Our focus is really on more, what are the underlying waves of growth that are happening within the market and how do we get more and more products onto those waves.

So with that, I think we're positioned pretty well for 2026. And that's in both new products as well as the markets we're serving. So AI is continuing to show no signs of abatement. It's still growing. The expanding technology, both on the HBM -- both on the memory and the logic side is creating new opportunities, new capital intensity demands. We talked about some of them in the last earnings call, subsurface inspection, et cetera.

But then we have new products as well. So new products in 3D metrology that are moving well through qualification at large accounts and also being already adopted by smaller accounts. We mentioned OSATs last earnings call and co-packaged optics as well. And then, of course, the critical films, big, huge market, $500 million market, making very good progress moving the Iris G2 through that. And the other one for next year is, of course, the Dragonfly G5, the next-generation high-resolution tool.

I'll ask more on that later. I guess next year, you are well on track to maybe outperform the market wherever the market is.

That's our view.

Okay. Great. And on the leading edge, I just want to ask what's your visibility now because some of your large OEM peers are seeing some seasonality among nodes in maybe second half. But it seems like you guys saw some like adjustment in Q2 and maybe to some extent in Q3 as well, but you are expecting Q4 to be back to peak levels. So just could you help understand the disconnect here?

So I'm not sure the disconnect per se. So if you look at our growth this year in advanced nodes, it's nearly 2x, nearly 100%. I don't think any peer is talking about 100% growth. So it's really hard to say peer-to-peer comparison when we're significantly faster. And why are we so much faster? The market is not clearly growing that much. But it goes back to what I talked about earlier, the different products we put on the wave. So as DRAM expansion was required because of the HBM, we weren't just getting OCD revenue anymore. We were getting films business. We were getting integrated metrology. So we added more to that wave of growth.

Similar to another example would be the new gate-all-around customer we added. Instead of just an OCD order, we significantly increased the size of just that small pilot line by adding the films business as well. So I think when you look at it from -- we're not just talking about growth due to market -- end market demands, but also what we're doing to enable the revenue, and that's why we're seeing this kind of an outperformance. The -- for sure, the revenue in advanced nodes for us was second -- first half weighted. We saw the biggest growth there. We always predicted the Q3 drop. We talked about that early on. And we still expect some kind of a Q4 improvement, not as big as it was, but AI packaging is now bigger than we expected for Q4. So net-net, about the same.

Okay. Great. And we hear some people -- some of the international peers are talking about maybe 3-nanometer can be larger -- like 2 nanometers next year might be smaller than 3-nanometer investment going into next year. Do you agree with this view?

2-nanometer can be smaller than 3-nanometer. Meaning FinFET versus gate-all-around?

Yes.

Not from what we see. So I'm not sure where that comes from, but at least our customers and TSMC has been public about this. They see a very long and sustained demand for the gate-all-around node. And I think the performance benefits from the -- both the speed and the power consumption, the reduced power consumption of the gate-all-around transistor versus FinFET are pretty compelling. So I think once certain level of critical mass starts adopting it, the rest have to follow or risk being left behind.

Okay. That's fair. And on the packaging side, now there is a large competitor in the market and gave you some pressure in the 2.5D side. And then there is a smaller competitor on the front-end who has been also very vocal about gaining share in the packaging side. So I guess first question was, what is Onto's competitive advantage here? How do you maintain your leadership position in the back end? Is there any like pricing pressure you're seeing on that side, too?

No. As far as pricing goes, it's the opposite with the entrance barely of that one competitor, we're seeing an opportunity to increase price. So as the -- and it's really not so much them. As that customer required much more advanced inspection. It's a chance for us to move a tool that we've been developing over the last 3 to 4 years for front-end applications quickly adopted for the back end. So that's -- that gives us an opportunity to significantly increase pricing. The -- and the value associated with that.

From the other side, the other front-end company you mentioned. I would say, I'm not sure about the share. I think what we're seeing is more the pie is growing. There's a lot of different applications in -- that customers need resolved and solved, and they're solving some. So we don't see any share -- you worded a share loss. We don't see any share loss to that second competitor. So we're continuing to grow our films metrology business. We're continuing to add additional metrology capabilities, the subsurface inspection. We're continuing to grow. We do know that they've solved some unique requirements in TSV and maybe some others that I'm not even aware about, based on some of the capabilities of their sensors that maybe we don't have. So I think that just shows that the complexity and the importance of the market.

Okay. And I guess I have to ask what gives you the confidence to gaining share back next year on the twin hub packaging?

So I think we've had a strong market share for a very long time. We'll continue to develop that strong market -- the technologies that the customers need to maintain that strong market share. We are with G5. We clearly demonstrated that in the early part of this year, where the customer is very close into wanting to decide one way or another and then deciding, please, pull in the G5, that's the tool we really want. So that's one piece of confidence.

But the other is just the performance. We're seeing the application studies that we're getting, so the wafers we're getting and customers want to see results. The results are impressive. And the feedback we're getting is very impressive. So the tool wasn't designed for just solving this one issue, but several generations ahead, and that performance is quite frankly, compelling. There's also some new capabilities in there that we're also now starting to see emerging applications and hybrid bonding that could benefit from those new capabilities. So I think we have a very compelling story on this tool.

It's good to know. And could you share what is a -- you provide -- you said you're passing some milestones in our last earnings call to get like requalified, I would say, with your key customer. So can you share what is the latest? And when do you expect shipments to ramp for that customer?

So the really nothing changed. Between the Q2 and the Q3 call, really nothing changed. We said when we announced the share situation that the customer was already engaged with us sending wafers and working with us on developing and accelerating the new tool. And then the next quarter, I just said, yes, and it worked. I never had any doubt it wasn't going to work, or I wouldn't have ever mentioned it. So really, all we did was continue to execute along the plans and we are going to continue to execute.

And I'd mentioned, I guess the one big piece of real news from last quarter is we said we'd ship one tool, and now we're going to ship a few tools to several different customers. So clearly, demand for the technology is growing.

Okay. Good. And you touched a little bit earlier about what are the newer opportunities for next-gen Dragonfly, anything specifically? You talked about hybrid bonding earlier but anything else?

We talked about hybrid bonding because there's going to be -- and we've known this for a while working with our customers. There's a real high amount of concern over voids in the hybrid bonds. And even I think I talked about last -- maybe last year, even just 1 micron void when the -- between the wafer stack or dye stack, the next stack on it with that compression that 1 micron void makes a crack that pops through the entire dye stack sideways. So that wipes out the whole stack. So it's a very big concern.

So what causes those voids, 2 main areas they're focused on. One, the flatness of the pads. So if it's like a cup and you push, you have void. It's not totally flat. The other is very, very tiny particles. So even a small particle can potentially cause a void. So that G5 will have the ability to inspect for those types of particles. So that creates a new opportunity for us and it's very high resolution. So it's a relatively slow inspection, and we think it's going to be high sampling. So maybe 100%, but certainly high sampling. So that creates new opportunities. What was the first part of your question?

Any other opportunities?

On the other -- yes, I know there's one more point I wanted to make. It was the front end. Of course, there's the whole front-end opportunity, which is what the original intent of this. The front end market for macro inspection is probably around $400 million, $500 million. It's served only by 1 competitor. And the customer feedback is pretty positive about the capabilities we're providing, not just with the G5, but other sensors we're combining in there to enter into that market. So that's another area. It will take some time to develop. So I would say in 2026, we should see some movement and then real revenue maybe in 2027. But by movement, I mean initial orders.

Okay. Got it. And what is your expectation on hybrid bonding on the timing? It's a moving target I know.

It's a moving target. I'm getting the sense that the customers will -- I might be wrong and Sydney yells at me later. But getting a sense of customers will delay this transition for as long as they can. They keep pushing it out, pushing the yields, pushing the capability of the existing technology before making that cut to the hybrid bonding. So who knows what innovations they have in the pipeline. But for sure, hybrid bonding is on their road maps. For sure, everyone's get investments, meaning all the 3 main memory guys have investments to be ready, but I also see them continuing to push and push and push.

Is the main concern, the cost or the yield or like supply chain...

I think they're tied. So the cost and the yield, if the yield is low, the cost becomes much higher. So I would say they're somewhat tied. And yes, it's the yield.

Okay. Got it. And on the HBM side, it looks like the third HBM customer is finally getting some traction. So could you talk about your market share position across all 3 HBM customers? And if the third customer get qualified, how does that mean for Onto?

So it's not just Onto, so if the third customer gets qualified, the industry, right, so now qualified -- the second part of that is also how much allocation do they get. So if they get allocated a small amount and the other 2 have to increase, then that's good for everyone. If they get allocated a large amount to take up all of their excess capacity, then the other 2 have to expand just a small amount. And because they have excess capacity, not just from us but from -- they had lines ready to go, that will kind of be a bit of a digestion period for the industry.

Yes, that's fair. And what is your share position with all 3?

It's very similar across. So extremely strong, extremely high with 2D inspection and activities in all 3 with 3D inspection, 3D metrology, so I should say. And it's the same with some of the other technologies, subsurface inspection, things like this.

I'll pause here to see if there's questions in the audience. Okay. I'll keep going On the new products, I know you'll be happy to talk about it. So can you talk about the progress you are making with the new products, especially with the 3Di metrology, but maybe others you want to share as well?

So for 3Di metrology, we talked about having 10 customers now already adopting the technology, including new applications and co-packaged optics, which we think is another future wave, fairly meaningful wave of growth, given the extreme growth in AI and the power problems tied to AI. So I think that's going to be a big one. And the OSAT, so a Tier 1 OSAT for bump applications. The big thing, the other area that we're focused on is qualifying for some of the Tier 1 semiconductor manufacturers. So particularly the memory guys. So there, the process is much more rigorous. It's taking time, and we're working through it. By time, it's really around stability testing now.

So making sure these metrology tools can measure the same way every time for a month at a time. And any deviation, we have to restart the clock. So we make some changes, improvements, and then the clock restarts. So that's taken some time, but I think we're moving pretty well through that process, and we should be seeing light at the end of that tunnel. And then the question is, okay, well, how quickly will they adopt the new technology moving into next year? For sure, the performance is proving out what we expect and what the customers were hoping for. So it's definitely more sensitive, it's definitely more repeatable. It's faster than the incumbent technology. We also are opening up new applications. So in the bumping area -- it's a long story. Do you want me tell?

Yes. Go ahead.

All right. So in the bumping area, there's -- most of this metrology happens after solder bump, solder caps are put on the copper pillars. That's not an ideal step, but it's because of the existing technology, that's the only way it was able to measure. Otherwise, there's too much scattering on the top surface of the copper pillar bumps. We're showing in partnership with an OEM that also selected our tool early on. We're showing that we can measure actually that pre-reflow step, and there's a big yield benefit to customers if they shift when they do the measurement. So they can do more rework and save yield. So that's a fundamental improvement that customers can gain from the tool as well.

It's good to know. And I want to ask about the Semilab acquisition. Could you just add more color around the pending acquisition? And what is the market you're after for this acquisition? And any early thoughts on the synergy opportunities? I know you are like probably waiting for the deal to be closed, but anything you can share right now.

Yes. Synergies will leave to the side, at least the quantification. I think there's some synergies we talked about with our Ai Diffract, so our modeling software, being able to enhance the capability of some of their tools, so adding more value to our customers. The big advantage, though, is that their technologies are applicable to a wide range of markets. So it wasn't very a market-specific deal. It was really us bringing in some new and unique technology that we felt we could add, we could further enhance and we can enhance them in 1 -- in 2 ways.

One, our channels to market. So we see opportunities. We talked about this on the call in the surface charge metrology, which is going to be a growing concern for -- as chiplet architectures continue to migrate and become more widely adopted in the marketplace by designers. That's going to be a critical source of yield loss. There's no other way to measure it, except this tool. So that's going to be important. And we have good channels to market to help enable that transition.

The other is on the materials characterization side, and that's where we can add some enhanced capability, also potentially with some of the other metrology systems that we have as well. So not just the software but also some technology.

What do you see -- how do you see the market of materials characterization or materials metrology? Because I think it's kind of a smaller market, but it's very dominant by another player in this space. So how do you see the market growth going forward?

I think there's a lot of -- so it's a broad term, and I think there's a lot of growing interest from the customers as the use of exotic materials and more materials in the advanced nodes and advanced packaging continue to add complexity. It's not just about dimensional metrology, it's about how these materials are interfacing with each other. And there is one player who's doing well with X-ray systems in that space. But it doesn't solve all the materials characterization challenges that customers have.

We have one little piece with the element, but that's only composition. That's only one piece. So customers are looking for more solutions. This team has some interesting technology. They don't have the service and support infrastructure, not as broadly as we do specific to these high-volume manufacturers. So we think that, that will be -- eliminate one barrier to a more wide adoption of this type of technology. So it's an area that we need to continue to look at.

Okay. Great. I guess, next...

I do think it's an area that's growing.

Definitely. And I guess I have to ask about panel-level packaging. So what is your latest expectation for panel substrates? And is there a moving target as well? Like how does it compare with what your expectation was maybe last year or like 2 years ago when you held the Investor Day?

I would say it's somewhat of a moving target, but really tied to the enterprise. So if you look at enterprise server market, that hasn't really recovered yet. And that was -- the AMDs, the Intels, they're heavy users of the panel substrate technology. So they pushed the substrate manufacturers to increase capacity quite a bit. We've delivered a lot of tools and the utilization is still -- so I think that will recover. That will return.

But the other big inflection that's happening, and we always said it was unclear when the transition would be is the move to glass. So that we see continuing to build momentum. So it's not like stalled out. It's not like just a few research. We see more and more players. Our apps lab is completely the pace, the application center of excellence we built for that, very full with engagements from customers, many, many customers. So I think that area is still -- it's still early, but also very transformative. So when you think about being able to drive -- if you're limited to about 5 microns or so on an advanced IC substrate, being able to take that down to 1 micron and being able to put all the RDL on a single surface has much better thermal capabilities than the IC substrates, there's a lot of compelling advantages to glass. Challenges, technical challenges, but those are being worked through.

Yes. That's fair. And on gross margin, you are on track to achieve $1 billion in revenues this year, maybe not far from that. And then it seems like gross margin is a bit below your long-term target model of I believe it's 56%, 57%. So -- could you talk about puts and takes there? Like how should we think about -- how do you improve the profitability going forward?

You hire a new CFO. Seeing if anyone is awake. So several areas. We have been behind on improving our margin profile. And I think we are taking steps to address that. But beyond a little bit of a joke is the moves we're making on the supply chain. We've talked about common EFEM and bringing that. So we had 7 or 8 different EFEMs across the organization. That's a huge inefficiency and it also limits our ability to extract value from suppliers. By moving to a common EFEM across all of our platforms, that's a big savings. The shift to overseas manufacturing and the ability now for us to have far better business continuity, but also a supply chain based in Asia, several areas in Asia. That's also going to provide help. And then just better, let's say, operational discipline, better efficiencies. Back to the discipline we had in the past. And I think we'll see -- certainly the long-term operating model is well within our reach, if not even improving on it.

The other piece is also, some of these new products that we're bringing to market, the G5, the Iris critical films, they will all be margin accretive. They're significantly more advanced than the prior generations. And Semilab will be margin accretive. So that's another one. So yes, I think the margin story will be a positive.

Okay. And if you look at Onto over the next 3 to 5 years, what kind of key technology transitions you're watching closely? And what is the most exciting driver for your business?

That's a good question. So I think from a technology transition for us, we're very careful not to get obsessed with any particular transition. For instance, we won CoWos 7, 8 years ago, went nowhere. If we are obsessed with that, okay, we'd wait 7, 8 years, then we'd finally be heroes. But no, then we were on to InFO and we're onto the mobile and the RF, 5G transition. So for us, it's -- and now, of course, AI packaging explodes, and we're right there. We're on top of it.

So for us, it's more about not trying to pick and watch the winners and losers, but make sure we continue our strategy of expanding our footprint across the value chain and the depth of our footprint in each of those accounts. So that's the beauty of the types of products we produce. The macro inspection is broadly applicable. The films is broadly applicable. And then we have various additional capabilities in materials characterization, other sensors that are also broadly applicable to power and front end and packaging markets.

So then when the different waves of growth occur, we're right there, we're on them and we ride them. Power semi is another great example. Pretty flat for most people, but we've been having very strong growth in power semi the last several years. This year is kind of flattish, but off of a record year last year. So that's why we don't obsess over 1 or 2 particular things. But not to be facetious and to answer your question a little more specifically, packaging is clearly an area that we're excited about. We see so much investment happening in packaging, finally, an area that we have a very strong position in. And it's not just in, let's say, the traditional shrinks that you see in the front end, but we're seeing the 3D expansion, but we're also seeing the heterogeneous -- the adoption of heterogeneous dye and the complexities associated with that as well as the move to panel.

So if you have heterogeneous dye, you can't process it very effectively on a round silicon wafer. So the shift to panel is there as well. So a lot of new challenges in the packaging area tied to many different markets. So whatever end market drivers you're looking at, enterprise server, enterprise market, AI, power semi it's all going to tie into these packaging advances.

That's a great answer. On capital allocation, after Semilab, what's your priorities on capital allocation? Are you doing more M&As or...

Yes. I think so from a capital return perspective and from an increasing shareholder value perspective for a company of our size, for the markets that we're serving, we still think M&A is the best source of return, the best allocation for the capital. But of course, every quarter, as we've said to investors, we're looking at the M&A pipeline, comparing it to the stock and the opportunities, and we're always making the decision, where best to deploy that capital. We're a strong cash generator. So we're lucky that we continue to increase our capital so that we have the ability to deploy it in the way that's most advantageous for the shareholders.

How do you look at M&A opportunities? What is the criteria?

Yes. A lot of investors look for hurdle rates or particular numbers that we're trying to hit. I think that's too limiting. So for us, we look at first the -- essentially the synergies we think we can extract from it. And the closer to the center of our bullseye, which is going to be around the broad markets we serve and the software and the optics capabilities. So that -- those are our core competencies. To the extent we expand on those core competencies, we strengthen all the businesses, not just the 1 business we might be acquiring. So that's the strategic nature of it.

From a financial nature, Obviously, we're not here to dilute our margins. So there's many deals that we could do that we walk away from just because they're too dilutive, and we don't see enough synergies to actually improve. So there's not a good fit. The Semilab is a great example of a company that we worked with and we had to cultivate and it wasn't one that was obvious to people. But that's an example of why we kept telling investors. We're working the pipeline. Pipeline is getting better and stronger, and it is. Our M&A pipeline, now that we focused on it, I guess, starting 3 years ago, is pretty robust. And it's not through the run of the mill, everybody knows the same names.

That's fair. And then we have a couple of minutes left. So just any final remarks that you think investors are missing in the Onto story?

Final remarks. Well, I think there was an overreaction to our ability to compete. So I think that's a little hard for me to understand because that competition there from all those sides that you mentioned, has always been there. That's the nature of competition. And we've always been able to maintain it. So I think as we look forward and as we continue to drive the G5 adoption and demonstrate the capabilities that we'll be back in the good graces.

Okay. I like that. All right. Thanks, Mike, for coming to our conference. Thanks, everyone, in the audience.

Thank you.