Onto Innovation’s 2026 Q2 Earnings Call: Advanced Packaging Growth and Gross Margin Drivers Don’t Match

Date of Call: Aug 6, 2026

Financials Results

• Revenue: $343 million, up 18% sequentially and 35% year-over-year
• EPS: $1.93 per share, up 20 cents over the high end of previous guidance range
• Gross Margin: 57%, up 250 basis points from Q4 2025 and 130 basis points sequentially
• Operating Margin: 30%, up nearly 500 basis points from the beginning of the year

Guidance:

• Revenue expected to grow more than 25% in second half 2026, up from previous expectation of 15%.
• Q3 revenue expected in the range of $380 to $400 million, with additional uptick in Q4.
• Gross margin to expand an incremental 50 basis points per quarter in Q3 and Q4.
• Operating margin expected to increase by 200 basis points to 32% in Q3 and exit the year at 33% or higher.
• EPS at the midpoint of Q3 guide would be approximately $2.28 per share.

Business Commentary:

Record Revenue and Strong Growth:

• Onto Innovation reported revenue of $343 million for Q2, up 18% sequentially and 35% year-over-year.
• The growth was driven by strong demand for advanced nodes and advanced packaging, particularly in AI and enterprise server applications.

Advanced Nodes and Packaging Growth:

• Revenue from advanced nodes grew 50% sequentially, while the inspection business, dominated by Dragonfly systems, grew by 30%.
• This was attributed to the recognition of advanced packaging as a technology enabler and increased demand from AI applications.

Increased Backlog and Visibility:

• The company reported a record backlog surpassing $1.1 billion, indicating strong customer confidence and visibility into future demand.
• The backlog growth is driven by increasing levels of visibility from customers, allowing for more accurate forecasting and planning.

Gross and Operating Margin Expansion:

• Onto Innovation achieved a gross margin of 57%, representing an increase of 250 basis points from Q4 2025 and 130 basis points from Q1.
• The improvement in margins was due to operational productivity gains, improved forecasting, and the move to extended factories.

Strong Demand for Dragonfly G5 and New Applications:

• The company saw unprecedented demand for the Dragonfly G5, with orders totaling over $200 million from a single OSET partner.
• The demand was driven by the product's high resolution and ability to open new applications in heterogeneous packaging for AI.

Sentiment Analysis:

Overall Tone: Positive

• Management stated the team 'delivered an outstanding quarter,' 'setting new quarterly revenue records.' Outlook is 'equally exciting' with 'record backlog surpassing $1.1 billion' and raised second half revenue growth outlook to 25% or more. Advanced packaging growth outlook raised to approximately 80% for the full year. Strong demand and customer confidence underscored.

Q&A:

• Question from Craig Ellis (B. Riley Securities): Can you provide color on the mix and duration dynamics of the $1.1 billion backlog and the confidence it gives for 2027 revenue and growth?
  Response: The backlog reflects strong customer confidence and secure supply needs; about 60-70% is for 2026 and 30-40% extends into 2027, boding well for another year of strength.

• Question from Craig Ellis (B. Riley Securities): Is there gross margin expansion potential beyond 2026 into 2027?
  Response: Yes, 2027 expansion will come from continued scaling of extended factories and ASP growth as the higher-priced Dragonfly G5 ramps to become a larger portion of revenue.

• Question from Melissa Weathers (Deutsche Bank): How much of the growth is due to faster TAM/SAM growth versus market share gains or new products?
  Response: It's a mix of both the industry growing aggressively and Onto gaining share through new applications, customer adoption, and expanding footprint in factories.

• Question from Melissa Weathers (Deutsche Bank): What is the revenue capacity and capacity expansion plans to support growth into next year?
  Response: Capacity is not constrained; extended factories in Asia provide higher capacity than U.S. sites, with steps to add shifts and reduce cycle times. Supply chain is being actively managed.

• Question from Brian Chin (Stiefel): What are the drivers of the advanced packaging inspection growth, and what is the expected Gen 5 vs. Gen 3 mix for Dragonfly in 2027?
  Response: Growth is driven by expansion of 2.5D, new innovative packaging, HBM, and 3D metrology. The Gen 5 mix will increase but no specific quantification is provided yet.

• Question from Brian Chin (Stiefel): How has the specialty segment improved, and is silicon photonics in specialty or advanced packaging?
  Response: Specialty is more flat than expected, helped by silicon photonics. Silicon photonics is in the specialty segment, with potential for incremental growth in 2027.

• Question from Edward Yang (Oppenheimer): Is the backlog accelerating revenue growth or moving to a stable elevated run rate?
  Response: Backlogs are growing, indicating customer confidence. Shipment patterns are lumpy, but the backlog provides a good indicator of underlying demand strength.

• Question from Edward Yang (Oppenheimer): Could there be upside to the Q4 revenue guide given the sequential growth implied?
  Response: Sequential growth from Q3 to Q4 is expected to remain rapid, with Q4 revenue potentially reaching the low 400s based on the midpoint guide, implying continued upside potential.

• Question from Matthew Prisco (Cantor): What is the update on traction and customer conversations for G5 in front-end and Iris G2?
  Response: Both Iris G2 and G5 for front-end are progressing according to plan, with shipments made and qualification/testing ongoing; bigger contributions are expected in 2027.

• Question from Matthew Prisco (Cantor): What is the visibility across end markets and lead times, and how does that set up for 2027 growth?
  Response: Visibility has improved significantly in advanced packaging due to AI-driven demand. Opportunities for revenue gains exist even if the market is flat in 2027, via SAM expansion and new products.

• Question from Crawford Clark (Jeff Reyes): How broad-based was the advanced node growth across logic vs. memory, and what drove it?
  Response: Growth was broad-based across NAND, DRAM, and logic, with memory comprising about 60% and logic about 40% of the advanced node business in Q2. The Atlas G6, with its smaller spot size, drove adoption in smaller geometries.

• Question from Crawford Clark (Jeff Reyes): Can you explain the panel-level packaging opportunity and the different approaches?
  Response: The company attacks panel-level packaging from three angles: JetStep for large panels, Firefly with G5 optics for advanced process control, and application of existing packaging technologies to COPOS panels.

• Question from Vedvati Shrotri (Evercore ISI): How does the advanced node and packaging strength split between logic/memory and HBM vs. non-HBM?
  Response: For advanced nodes, memory is about 60% and logic 40% of the business, with similar growth rates. For advanced packaging, 2.5D and HBM have shown consistent growth, with HBM remaining strong.

• Question from Vedvati Shrotri (Evercore ISI): How far does visibility extend into second half 2027?
  Response: Discussions with customers are constructive, and the process of negotiating VPAs for 2027 is beginning, adding to confidence for that year, though backlog currently does not extend that far.

• Question from Shane Brett (Morgan Stanley): Is the advanced node outgrowth reflective of a more memory-skewed portfolio or capturing incremental dollars from a broadening logic base?
  Response: The growth is not due to being more memory-skewed; it results from adding new products and expanding the technology wallet share with existing customers.

• Question from Shane Brett (Morgan Stanley): How should we think about the mix shift in advanced packaging between co-ops, SOIC, and HBM for 2027?
  Response: The company serves broadly across the value chain and expects tailwinds for SOIC and other new areas due to the Dragonfly G5's higher resolution, with no expected headwinds.

• Question from Nazirq Bamikan (Freedom Broker): Which products are used in silicon photonics and how is demand expected to scale?
  Response: Both inspection (which includes some metrology) and iris films metrology are used. Demand is expected to ramp linearly with volume, with the served addressable market projected to grow to over $500 million by 2030.

• Question from Nazirq Bamikan (Freedom Broker): What is the updated standalone growth outlook for advanced packaging into 2027?
  Response: Advanced packaging is expected to grow at least 80% in 2026 and continue growing into 2027, with no signs of overcapacity and customer demand for more ramped capacity.

Contradiction Point 1

Advanced Packaging Growth Outlook

Contradiction on whether growth will moderate after 2026.

Nazirq Bamikan (Freedom Broker) - Nazirq Bamikan (Freedom Broker)

2026Q2: Advanced packaging is expected to grow at least 80% in 2026, and growth is expected to continue into 2027... No signs of overcapacity are seen. - Mike Plosinski(CEO)

What is the updated standalone growth outlook for advanced packaging through 2027, and will there be moderation following the strong 2026 build-out? - Vedvati Shrotri (Evercore ISI)

2026Q2: Visibility is strong into the first part of 2027. - Mike Plosinski(CEO)

Contradiction Point 2

Gross Margin Expansion Drivers

Contradiction on the primary driver for 2027 gross margin expansion.

What are your thoughts on recent market conditions, Craig Ellis (B. Riley Securities)? - Craig Ellis (B. Riley Securities)

2026Q2: Gross margin expansion in 2027 will be driven by the Dragonfly G5 ramp... and scaling of extended factories in Asia. - Brian Roberts(CFO)

Does gross margin expansion potential remain by 2027? - Craig Ellis (B. Riley Securities)

2026Q2: Gross margin expansion in 2027 will come from continued scaling of extended factories and ASP growth as the higher-margin Dragonfly G5 ramps... - Brian Roberts(CFO)

Contradiction Point 3

2027 Gross Margin Expansion Drivers

Contradiction on which product's ramp is the primary driver for future gross margin expansion.

Craig Ellis (B. Riley Securities) - Craig Ellis (B. Riley Securities)

2026Q2: Gross margin expansion in 2027 will be driven by the Dragonfly G5 ramp, which brings higher average selling prices (ASP) as it becomes a larger revenue proportion. - Brian Roberts(CFO)

Is there still gross margin expansion potential in 2027? - Ezra Weiner (Jefferies, for Blayne Curtis)

2026Q1: Margin improvement is expected as G5 ramps... a more significant impact will be seen in H2 2026 and more prominently in 2027 when G5 becomes a higher percentage of inspection revenue. - Michael Plisinski(CEO)

Contradiction Point 4

2027 Advanced Packaging Growth Outlook

Contradiction on the expected growth rate for advanced packaging into 2027.

Nazirq Bamikan (Freedom Broker) - Nazirq Bamikan (Freedom Broker)

2026Q2: Advanced packaging is expected to grow at least 80% in 2026, and growth is expected to continue into 2027. - Mike Plosinski(CEO)

What is the updated standalone growth outlook for advanced packaging into 2027, and should we expect moderation following the strong 2026 build-out? - Matthew Prisco (Cantor)

2026Q1: Overall advanced packaging revenue is expected to grow over 50%. - Michael Plisinski(CEO)

Contradiction Point 5

Advanced Packaging Growth Outlook

Guidance on 2026 growth rate shifts from over 30% to at least 80%.

Nazirq Bamikan (Freedom Broker) - Nazirq Bamikan (Freedom Broker)

2026Q2: Advanced packaging is expected to grow at least 80% in 2026, and growth is expected to continue into 2027. - Mike Plosinski(CEO)

What is the updated standalone growth outlook for advanced packaging into 2027, and should we expect moderation after the strong 2026 build-out? - Ezra Weener (Jefferies)

20260220-2025 Q4: The company expects its advanced packaging revenue to grow over 30% in 2026. - Michael Plisinski(CEO)

Contradiction Point 6

Backlog Duration and Visibility

Characterization of backlog visibility and its extension into the future differs.

Vedvati Shrotri (Evercore ISI) - Vedvati Shrotri (Evercore ISI)

2026Q2: Not much backlog extends that far [into second half 2027], but discussions with customers are constructive. - Mike Plosinski(CEO)

How far into the second half of 2027 does visibility extend? - Ezra Weener (Jefferies)

20260220-2025 Q4: Visibility has improved significantly. - Michael Plisinski(CEO)