Onto Innovation Inc. (ONTO) Earnings

Management highlights

- Core Growth Drivers for Semiconductor Demand • Increasing industry recognition of advanced packaging as a critical technology enabler for AI and enterprise server performance, which has improved customer visibility relative to historical consumer-driven demand cycles • Growing adoption of smaller advanced node transistor geometries, requiring more precise process control solutions • Emerging new high-growth opportunities in silicon photonics and panel-level packaging driven by heterogeneous packaging trends - Product and Customer Wins • The newly launched Dragonfly G5 inspection system has generated unprecedented customer demand, including a single $200 million order from one OSAT partner, most to be delivered in 2027 • The company has received over $50 million in orders for silicon photonics production support, with ~two-thirds of these orders to be delivered in 2027; the served addressable market for silicon photonics is projected to grow to over $500 million by 2030 • Advanced nodes revenue grew 50% quarter-over-quarter to a new quarterly record, with broad-based strength across memory and logic; multiple Atlas G6 systems will ship to a major DRAM customer in H2 2026 to support next-generation memory production • Both Iris Films and Integrated Metrology product lines are on track to hit record full-year 2026 revenue - Operational and Profitability Progress • Gross margin reached 57% in Q2, up 130 basis points from Q1 2026 and 250 basis points from Q4 2025, already exceeding the full-year 2026 target of 200 basis points of gross margin expansion • Operating margin hit 30% in Q2, up nearly 500 basis points from the start of 2026; the company is on track to deliver 350 basis points of total gross margin expansion and over 750 basis points of incremental operating margin expansion in 2026 • The ramp of extended factories in Asia has increased operational flexibility, reduced capital expenditure requirements, and lowered production costs, supporting margin improvements • Total backlog surpassed $1.1 billion, a new company record; as of Q2 end, the company held $1.9 billion in cash and short-term investments, and generated $62 million in operating cash flow in Q2

Guidance

- Full-year 2026 advanced packaging growth guidance was raised to approximately 80%, up from the prior 50% projection issued last quarter - Second half 2026 revenue growth guidance over the first half was raised to 25% or more, up from the prior expectation of 15%; Q4 revenue is projected to be higher than Q3 revenue - Q3 2026 revenue is guided to a range of $380 million to $400 million, with non-GAAP earnings per share of approximately $2.28 at the midpoint - Gross margin is expected to expand an incremental 50 basis points per quarter in Q3 and Q4 2026 - Operating margin is guided to 32% in Q3 2026, and 33% or higher to end 2026 - Full-year 2026 advanced nodes revenue growth is projected to exceed 35%, outpacing industry wafer fab equipment (WFE) growth expectations - 2026 panel-level packaging revenue is expected to more than double year-over-year, with additional growth in 2027 - Management expects continued gross margin and operating margin expansion in 2027, and expects On2 Innovation to continue outperforming overall WFE market growth, driven by new product expansion and share gain opportunities

Segment performance

Total Q2 2026 revenue was $343 million, up 18% sequentially and 35% year-over-year. 1. Advanced Nodes: Revenue of approximately $120 million, up 50% quarter-over-quarter. Memory represents 60% of this segment, growing 60% sequentially, while logic makes up 40%, growing over 40% sequentially. This segment accounts for ~35% of total Q2 revenue. 2. Advanced Packaging and Specialty Devices: This segment represents nearly 50% of total Q2 revenue. The Dragonfly inspection product line grew 30% quarter-over-quarter, driven by strong demand for 2.5D logic and HBM applications. Other packaging and specialty device sub-segments (including power and SDI) declined sequentially as expected. 3. Software and Services: This segment makes up the remaining ~15% of total Q2 revenue.

Risks & headwinds

- Ongoing headwinds from elevated material input costs, fuel surcharges, and freight expenses - Supply chain constraints remain a recurring industry concern, even as the company has managed supply chain disruptions effectively through recent growth cycles - Forward-looking projections are subject to inherent uncertainties that could cause actual results to differ materially from guidance, per standard forward-looking statement disclosures

Analyst Q&A

• Q: The analyst asks what the mixed and duration dynamics of the new $1.1 billion record backlog indicate about 2027 revenue growth potential. /

  A: Management states the large backlog primarily reflects strong customer confidence in their own multi-year expansion plans, with customers issuing purchase orders far earlier than historical norms. Approximately 60-70% of the backlog is tied to 2026 shipments, while 30-40% is for 2027, and the backlog mix follows the same growth trends of strong demand for HBM, 2.5D logic and advanced nodes, indicating another strong year of growth in 2027.

• Q: The analyst asks how much of the current strong growth is driven by faster industry TAM/SAM growth versus company-specific share gains from new products. /

  A: Management confirms growth is a mix of both aggressive industry-wide semiconductor capital expansion driven by AI demand and company-specific share gains. New product lines like integrated metrology have gained share in new logic applications where the company had little to no presence a year ago, with broader customer adoption happening faster than management expected three months prior.

• Q: The analyst asks how much capacity On2 Innovation has to support continued strong growth into 2027, and what steps are being taken to expand capacity. /

  A: Management notes the company previously had in-house capacity for $2 billion in annual revenue, and has since added equal production capability through its extended factory partnerships in Asia. These Asian factories are already adding second shifts (with room for third shifts), so the company is not capacity constrained. The firm is actively working with supply chain partners and leveraging its strong balance sheet to meet all customer shipment commitments.

• Q: The analyst asks what drivers have pushed full-year advanced packaging inspection growth guidance up to 80%, and what the Dragonfly G5 vs G3 mix will be in 2027. /

  A: Management confirms current growth is driven by expanding volume at OSATs for 2.5D packaging, strong demand for both 2D inspection and 3D metrology for HBM, and growing adoption of new innovative packaging technologies where Dragonfly is well positioned. While the Dragonfly G5 mix will increase in 2027, management declines to quantify it yet, noting G5's higher resolution opens new market segments that were previously not well suited for older generation products.