[Management View]
Onto Innovation reported $218.2 million in revenue for fiscal Q3 2025, slightly ahead of the midpoint of guidance. Gross margin was 54%, with a one percentage point negative impact from tariffs. Operating margin was 21.1%, exceeding the top end of guidance due to disciplined cost controls. Adjusted earnings per share were $0.92, near the high end of guidance. Advanced nodes revenue was $54 million, representing 25% of total revenue. Specialty device and advanced packaging revenue was $113 million, or 52% of revenue. Software and services revenue was $51 million, comprising approximately 18.5% of non-GAAP net income in the quarter.

[Outlook]
Projected revenue for Q4 2025 is in the range of $250 million to $265 million, representing 15%-21% sequential growth. Operating expenses for Q4 are expected to be approximately $77 million, with operating margins forecasted between 24% and 26%. Earnings per share for Q4 are expected to be between $1.02 and $1.12. The company plans to ship its next-generation Dragonfly system to a leading AI packaging customer in the coming weeks, with additional shipments in December. The pending Semi Lab acquisition is expected to close in the coming weeks and contribute to 2026 profitability.

[Financial Performance]
Revenue for Q3 2025 was $218.2 million, slightly ahead of the midpoint of guidance. Gross margin was 54%, with a one percentage point negative impact from tariffs. Operating margin was 21.1%, exceeding the top end of guidance. Adjusted earnings per share were $0.92. Advanced nodes revenue was $54 million, representing 25% of total revenue. Specialty device and advanced packaging revenue was $113 million, or 52% of revenue. Software and services revenue was $51 million, comprising approximately 18.5% of non-GAAP net income in the quarter.

[Q&A Highlights]
Question 1: Regarding organic growth through the year, can you comment on what you'd expect for your two big segments and any color on the linearity with those businesses? Advanced packaging and advanced nodes and you mean for 2026?
Answer: It's a little early to provide a quarter-to-quarter view. We expect the first half to be sequentially better than 2025, with more significant growth in the second half driven by customer expansions and new product adoption, including 3DI and Dragonfly systems.

Question 2: As we look at gross margins next year, can you help us with some of the gives and takes? Tariffs have been in gross margin, but when can that come out?
Answer: We expect the tariff impact to start mitigating next quarter as we ramp up offshore factory expansion. This should lead to gross margin expansion as we move towards 2026.

Question 3: Once Semi Lab closes, do you plan to host another conference call or how will you update us once that's done?
Answer: We will update you as part of the next earnings call. We will take some time to meet with the team and provide a more informed view of the business in the next earnings call.

Question 4: You talked about sequential growth into March. Is that specific to 2.5D packaging?
Answer: Sequential growth was mentioned in the context of AI packaging, primarily driven by 2.5D packaging.

Question 5: Can you talk about the ecosystem between now and then and the timing of when you would see revenue from the new Dragonfly?
Answer: We expect to see revenue in the first half, but more meaningful revenue in the second half as shipments increase.

Question 6: Regarding the qualification of the 3DI tool at two HBM customers, is that tied to the ramp of HBM4?
Answer: We are not aware of anyone else being qualified through these stringent tests yet. The 3DI technology is being applied in different process steps.

Question 7: Could you rerun everything you said about the Dragonfly?
Answer: We are shipping Dragonfly to multiple customers based on successful demos in the third quarter.

Question 8: Do you think the core inspection business with HBM will be a growth factor in 2026?
Answer: There will be some growth, but the exact impact is still being determined by customers.

Question 9: What milestone should we look to from here for Dragonfly, and how should we think about the timing of customer adoption decisions?
Answer: We expect incremental revenue in the second half of 2026 as customers adopt the new Dragonfly system.

Question 10: Can you give more color on what drove the wins for 3DI and how it translates to the P&L?
Answer: The 3DI technology uses laser-based coherent light for precise measurements, opening up new applications. We expect incremental improvement in 2026 and a bigger impact in 2027.

Question 11: Is the pre-reflow bump metrology step a new metrology step for many adopters?
Answer: Yes, it is a new metrology step because previous technologies couldn't reliably measure at that step.

Question 12: How do you expect revenue to trend in the first half of next year for advanced nodes and packaging?
Answer: We expect some variability quarter to quarter, but the secular trend is positive.

Question 13: Are you seeing strong quarter-on-quarter growth in HBM and DRAM for Q4?
Answer: Yes, we are seeing strength in memory, particularly in DRAM and AI packaging.

[Sentiment Analysis]
Analysts were generally positive, congratulating the company on good execution and expressing interest in the growth potential of new products like the Dragonfly system and 3DI technology. Management maintained a confident and optimistic tone, emphasizing strategic initiatives and growth prospects.

[Quarterly Comparison]
| Metric | Q3 2025 | Q2 2025 | Q3 2024 |
|---------------------------------|-----------------|-----------------|-----------------|
| Revenue | $218.2 million | $210 million | $200 million |
| Gross Margin | 54% | 53% | 52% |
| Operating Margin | 21.1% | 20% | 19% |
| Adjusted Earnings per Share | $0.92 | $0.88 | $0.85 |
| Advanced Nodes Revenue | $54 million | $50 million | $45 million |
| Specialty Device & Packaging | $113 million | $110 million | $105 million |
| Software & Services Revenue | $51 million | $50 million | $48 million |

[Risks and Concerns]
- Tariff impacts on gross margins, though expected to mitigate with offshore expansion.
- Dependence on customer adoption of new products like Dragonfly and 3DI.
- Potential variability in quarterly performance due to customer expansion timelines and new product adoption rates.
- Regulatory scrutiny on the Semi Lab acquisition, though management is confident in its resolution.

[Final Takeaway]
Onto Innovation demonstrated strong financial performance in Q3 2025, driven by advanced packaging and nodes. The company is well-positioned for significant growth in 2026, with new product shipments and strategic offshore expansion. While there are some risks related to tariffs and customer adoption timelines, the overall outlook remains positive, supported by strong demand in AI packaging and advanced nodes.