Executive Summary / Key Takeaways

• Enabling Next-Gen Microelectronics: Onto Innovation ($ONTO) stands as a critical enabler of the AI and advanced computing revolution, providing indispensable metrology, inspection, and lithography solutions that drive yield and performance in the most complex semiconductor manufacturing processes.
• Technological Moat Deepening: The company is significantly advancing its core technologies, notably with the next-generation Dragonfly platform for submicron inspection and the unique EchoScan system for void detection in hybrid bonding, which are expanding its addressable market and competitive differentiation.
• Robust Financial Trajectory: Despite near-term market fluctuations and tariff headwinds, ONTO demonstrated strong financial performance in 2024 with 21% revenue growth and 43% EPS growth, and anticipates a significant rebound in Q4 2025, with full-year advanced nodes revenue expected to nearly double.
• Strategic Expansion & Resilience: Recent acquisitions, including Semilab USA LLC, and the accelerated "region-for-region" manufacturing strategy in Asia, are poised to expand ONTO's portfolio, mitigate geopolitical risks, and enhance long-term financial performance and operational resilience.
• Aligned with Secular Growth: ONTO is strategically positioned to capitalize on multi-year secular tailwinds from accelerating AI demand, the proliferation of advanced nodes (GAA, HBM, 3D NAND), and the global "electrification of everything," which are increasing the capital intensity of process control.

The Unseen Architects of Tomorrow's Computing

Onto Innovation Inc. ($ONTO) operates at the very heart of the microelectronics industry, providing the advanced process control tools that ensure the quality, performance, and yield of the world's most sophisticated semiconductors. Founded in 1940, the company in its modern form, established around 2019, has consistently evolved to meet the escalating demands of chip manufacturing. Its core business encompasses optical metrology, macro-defect inspection, wafer and panel substrate lithography systems, and sophisticated process control analytical software. This diverse portfolio serves a broad spectrum of customers, from silicon wafer manufacturers and integrated circuit fabricators to advanced packaging houses and specialty device makers across LED, VCSEL, MEMS, CMOS image sensors, SiC/GaN power devices, analog, RF filters, and data storage.

The company's overarching strategy is to leverage its deep technological expertise and broad product suite to solve high-value problems for its customers, thereby improving yield and accelerating time-to-market for next-generation devices. This strategy is acutely aligned with three powerful secular trends reshaping the global technology landscape: the explosive growth of Artificial Intelligence (AI), the relentless march towards advanced nodes (Gate-All-Around, HBM, high-stack 3D NAND), and the pervasive "electrification of everything." These trends are driving unprecedented complexity in chip design and manufacturing, inherently increasing the capital intensity of process control—a sweet spot for ONTO's specialized offerings. For instance, TSMC (TSM) forecasts its revenue growth from AI accelerators to grow at a mid-40% CAGR over the next five years, while the nascent co-packaged optics market is expected to see a 30% CAGR over the same period, underscoring the immense opportunity.

Technological Leadership: The Core of ONTO's Moat

ONTO's competitive edge is fundamentally rooted in its differentiated technology, which provides tangible and often quantifiable benefits over alternative solutions. The company's platforms are designed to address the most critical yield-limiting challenges in advanced microelectronics.

The next-generation Dragonfly platform exemplifies this technological leadership. This advanced inspection system recently achieved a significant milestone by successfully validating its optical performance and scan time against a key customer's comprehensive new requirements for 2.5D logic packaging. This platform, which ONTO began developing several years ago, represents a "really big step forward" in optical systems, illumination, camera technology, and algorithms. It is designed for "submicron capability" and is expected to meet requirements for several generations ahead, including opening up opportunities in the front-end macro inspection market where ONTO previously did not compete. This expansion into front-end applications, coupled with its enhanced performance, positions Dragonfly to command higher average selling prices (ASPs) and capture significant market share.

Beyond surface inspection, ONTO is making strides in subsurface inspection and 3Di technology. Demand for subsurface inspection, crucial for die stacking process control, die crack inspection in memory and logic, and void/delamination detection in wafer bonding applications, is expected to nearly double in the second half of 2025 over the first half. The EchoScan System stands out as a unique technology for detecting yield-killing voids in bonding interconnects without the need for liquid immersion. This capability is critical for hybrid bonding devices, as "no other technology can find voids in these structures at this resolution." ONTO aims for a "very high percentage share" of the incremental market addressable by EchoScan. Meanwhile, 3Di technology is gaining traction, with tools shipped to over 10 different customers across memory, logic, OSATs, and specialty devices. It has secured competitive wins in co-packaged optics by measuring multiple high parameters and is vital for controlling chip pipe and flatness in next-generation AI packaging architectures.

In the realm of films metrology, ONTO's Iris platform has demonstrated strong traction, with successful qualifications in memory, logic, and packaging, contributing nearly $100 million in revenue for 2024. The Iris G2 platform is specifically designed for the estimated $500 million critical films market, with a tool expected to ship to a top-tier manufacturer in the coming months. This expansion in films metrology, alongside its established Atlas OCD tools, has led to significant wins, including over $20 million in orders from a new gate-all-around (GAA) customer, predominantly for Q4 2025. These technological advancements collectively deepen ONTO's competitive moat, enabling higher ASPs, better margins, and a stronger market position as the industry moves to increasingly complex 3D architectures and exotic materials.

Competitive Arena: Outmaneuvering Rivals in a Dynamic Market

Onto Innovation operates in a highly competitive landscape against formidable players like KLA Corporation (KLAC), ASML Holding (ASML), Applied Materials (AMAT), and Lam Research (LRCX). While these larger competitors often boast greater scale and broader portfolios, ONTO carves out its niche through specialized technological prowess and strategic agility.

Compared to KLA, a leader in process control, ONTO's specialized focus on optical inspection and 2D/3D metrology, particularly with its multi-sensor Dragonfly platform, offers superior precision and adaptability for specific yield challenges. ONTO's software-driven analytics provide a unique value proposition in transparent and opaque thin film analysis, differentiating it from KLA's more standardized offerings. In lithography, while ASML dominates the cutting edge with EUV, ONTO's JetStep lithography systems target large panel and advanced packaging applications, a segment where its new acquisitions are set to accelerate its roadmap. Against Applied Materials and Lam Research, who offer broad equipment ecosystems, ONTO's strength lies in its deep expertise in specialized metrology and inspection, often displacing incumbents with superior performance in areas like 3Di bump metrology and co-packaged optics.

ONTO's competitive advantages are clear: its proprietary technology, such as the EchoScan, offers unique capabilities with no direct atmospheric alternative for sub-micron void detection, positioning it for a "very high percentage share" in that incremental market. The company's integrated software ecosystem also fosters customer loyalty and enables faster innovation cycles. However, ONTO's smaller operational scale compared to its larger rivals could lead to higher costs per unit and potentially lower overall profitability margins. To counter this, ONTO is aggressively accelerating its R&D roadmaps and strategically expanding its portfolio through targeted acquisitions. The recent acquisition of Lumina Instruments, specializing in laser-based inspection for unpatterned wafers and panels, is expected to expand ONTO's market by $250 million annually within three years. Similarly, the acquisition of Kulicke and Soffa (KLIC)'s lithography business adds critical talent and patents to accelerate JetStep roadmaps, with both tuck-ins expected to be accretive to earnings within 12 months and generate up to $100 million in annual revenue within three years. These moves demonstrate ONTO's strategic positioning to enhance its competitive standing and capture new growth vectors.

Financial Performance: A Story of Growth and Resilience

Onto Innovation has demonstrated a compelling financial trajectory, reflecting its strategic execution and market alignment. In 2024, the company achieved robust growth, with annual revenue reaching $987.32 million, a 21% increase year-over-year. This was accompanied by a 37% surge in operating income to $187.10 million and a 43% rise in diluted EPS to $4.06. Gross margins consistently improved throughout 2024, culminating at nearly 55% in the fourth quarter, underscoring operational efficiencies.

The first half of 2025 continued this growth, with total revenue of $520.2 million, marking a 10.4% increase over the first half of 2024. However, the second quarter of 2025 presented a mixed picture. Revenue for Q2 2025 was $253.6 million, a 5% sequential decrease from Q1 2025, primarily due to lower sales to OSAT, foundry, and power customers in the specialty device and advanced packaging market. Gross profit for the quarter stood at $122.1 million, with a margin of 48.2%, a 6% sequential decrease largely attributed to a write-down of excess and obsolete inventory. Operating income was $32.2 million, resulting in a 12.7% operating margin.

Despite these sequential dips, ONTO's liquidity remains exceptionally strong, with cash, cash equivalents, and marketable securities increasing to $894.9 million at June 28, 2025, from $852.3 million at December 28, 2024. This was bolstered by $149.9 million in operating cash flow during the first six months of 2025, driven by improved inventory management, higher cash collections, and increased investment income. The company also strategically deployed capital, including $75.0 million for share repurchases in H1 2025, with $99.9 million remaining under its authorization.

Strategic Initiatives and Forward Outlook: Charting Future Growth

ONTO's forward outlook is characterized by strategic expansion and a confident rebound, underpinned by its technological roadmap and operational adjustments. The company anticipates Q3 2025 revenue to be a "low watermark" for the year, guided between $210 million and $225 million, reflecting a temporary pause in advanced node spending. Gross margin is expected to be 53% to 55%, including a 1 percentage point impact from tariffs, with operating margin temporarily compressing to 18% to 21%. Diluted EPS is projected between $0.75 and $0.95 for Q3.

However, management expresses strong confidence in a significant rebound in Q4 2025, with revenue expected to return to levels consistent with the first two quarters of 2025. This resurgence is driven by a "sharp acceleration in AI logic packaging revenue," projected to increase at least 50% quarter-over-quarter, effectively halving the anticipated decline in this area from earlier projections. Specialty device and advanced packaging revenue, supported by AI packaging and power revenue recovery, is expected to approach peak 2024 levels in Q4. For the full year 2025, advanced nodes revenue is expected to nearly double compared to 2024, and ONTO aims to outperform the broader WFE market, which is generally projected to grow in the 5% to 10% range. Power revenue is also expected to exceed its record 2024 levels.

A pivotal strategic move is the definitive agreement to acquire Semilab USA LLC for approximately $545 million in cash and stock, expected to close in the second half of 2025. This acquisition will add electrical surface metrology, surface charge metrology, and materials analysis technology, addressing new challenges in advanced nodes and packaging. The acquired product lines, which have grown at a 20% CAGR over the last five years, are projected to add over $130 million in annual revenue and be immediately accretive to gross margin, operating margin, and increase first-year EPS by more than 10%.

To mitigate geopolitical risks and tariff impacts, ONTO is accelerating its "region-for-region" manufacturing strategy, establishing capabilities in Asia. Shipments from these new facilities are expected to begin in Q3 2025, with roughly half of the product volume capable of being shipped internationally by the first half of 2026, aiming for negligible tariff exposure in 2026. This initiative is expected to yield "meaningful improvements to our financial performance in 2026."

Despite the optimistic outlook, ONTO faces risks, including ongoing U.S. export regulations to China, the potential for further tariff impacts (though mitigation is underway), and the inherent challenges of integrating acquired businesses like Semilab USA. Furthermore, changes in tax legislation, such as the "One Big Beautiful Bill Act" enacted in July 2025, are expected to increase tax expense in Q3 and Q4 2025, primarily related to foreign-derived intangible income deductions. The company also experienced over $10 million in JetStep lithography pushouts in Q4 2024 due to customer capacity needs, with reschedule dates still unclear.

Conclusion

Onto Innovation is a compelling investment thesis rooted in its role as a critical enabler of the semiconductor industry's most transformative trends. The company's relentless pursuit of technological innovation, exemplified by its next-generation Dragonfly platform, unique EchoScan system, and expanding Iris films metrology, positions it at the forefront of advanced process control. These differentiated solutions are not merely incremental improvements but represent significant leaps in capability, directly addressing the escalating complexity and yield challenges in AI packaging, advanced nodes, and power semiconductors.

While the near-term presents some choppiness, particularly a Q3 2025 revenue low point, the strategic acquisitions and operational initiatives, such as the Semilab integration and the "region-for-region" manufacturing strategy, are designed to fortify its competitive position and enhance long-term financial resilience. The anticipated rebound in Q4 2025, driven by accelerating AI logic packaging demand and a strengthening advanced nodes market, underscores management's confidence in ONTO's trajectory. As the world increasingly relies on sophisticated microelectronics, ONTO's technological leadership and strategic acumen position it as an indispensable partner, poised for sustained growth and value creation for its shareholders.