Onto Innovation (ONTO) Q2 2025: SemiLab Acquisition Adds $130M Revenue, Accelerates Margin Expansion Path
Onto Innovation’s pending SemiLab acquisition brings $130 million in new annual revenue and immediate margin lift, reshaping its advanced packaging and metrology portfolio. The quarter saw robust execution in AI packaging and advanced node segments, with clear signals of a Q4 rebound after a Q3 trough. Investors should focus on how new product adoption and regional manufacturing will drive resilience and growth into 2026.
Summary
- SemiLab Deal Transforms Portfolio: Acquisition adds high-growth metrology lines, boosting both revenue and operating margin profile.
- AI Packaging and Advanced Node Momentum: New platforms and customer wins set up a sharp Q4 revenue acceleration.
- Region-for-Region Manufacturing: Tariff mitigation and operational flexibility position ONTO for improved global competitiveness in 2026.
Performance Analysis
Onto Innovation delivered a quarter above guidance on both revenue and operating margin, driven by continued strength in specialty device and advanced packaging segments. Specialty devices and advanced packaging contributed 46% of revenue, while advanced nodes made up 35% and software/services 19%, reflecting a balanced portfolio with exposure to both high-growth and recurring revenue streams.
Gross margin held steady at 54.5%, with tariffs creating a modest drag, though productivity gains in R&D and operations offset much of the pressure. Cash generation remained robust, with $58 million in operating cash flow and a $44 million sequential increase in cash and investments, highlighting disciplined capital management ahead of the SemiLab acquisition. Notably, no share repurchases occurred as the company prioritized liquidity for the $545 million SemiLab transaction, which is set to be immediately accretive to both growth and profitability.
- Segment Mix Shift: Advanced packaging and specialty devices remain the primary growth engine, with AI packaging demand driving near-term upside.
- Tariff Cost Management: Tariff exposure was well-contained, with mitigation efforts already underway to drive future margin recovery.
- Cash Position Strengthens: Balance sheet flexibility supports both strategic M&A and ongoing R&D investment.
Q3 is set to mark a revenue low point due to advanced node spending pauses, but management projects a sharp Q4 rebound, underpinned by AI packaging acceleration and new product ramps.
Executive Commentary
"The acquired product lines are projected to add over 130 million in annual revenue, be immediately accretive to both growth and operating margin and increase first year earnings per share by more than 10%."
Michael Placinski, Chief Executive Officer
"Gross margin for the second quarter was 54.5%. Excluding approximately 1.1 million of expense incurred in the quarter due to tariffs, gross margin would have been approximately 55%."
Brian Roberts, Chief Financial Officer
Strategic Positioning
1. SemiLab Acquisition: Immediate Scale and Strategic Synergy
The pending $545 million SemiLab acquisition adds electrical surface metrology and materials analysis to ONTO’s portfolio, expanding its addressable market in advanced nodes and packaging. The acquired lines have grown 20% annually over five years, outpacing wafer fab equipment (WFE) sector averages. Management expects the deal to be immediately accretive to both EPS and operating margin, with upside from future synergies as engineering teams integrate capabilities such as surface charge metrology and AI-driven modeling.
2. AI Packaging and Dragonfly Platform: New Growth Vectors
AI packaging remains a central growth driver, with next-gen Dragonfly inspection systems validated by key customers for 2.5D logic packaging. Multiple customers are pulling in orders for both high-resolution and subsurface inspection, with Q4 AI packaging revenue expected to rise at least 50% sequentially. The Dragonfly platform’s versatility is unlocking new applications, from die stacking to wafer bonding, while also defending ONTO’s position in high bandwidth memory (HBM) inspection.
3. Advanced Node Expansion and Wallet Share Gains
Advanced node revenue nearly doubled YoY, with new wins in gate-all-around (GAA) technology and films metrology. ONTO is increasing its wallet share at leading-edge customers by delivering a broader suite of optical metrology tools, including the new Iris G2 platform for critical films. While Q3 will see a pause in advanced node spending, Q4 is expected to rebound strongly as customer capex resumes and ONTO’s expanded offerings gain traction.
4. Region-for-Region Manufacturing: Tariff Resilience
ONTO is aggressively localizing manufacturing in Asia, aiming to halve international product shipments from new regional facilities by H1 2026. This strategy is designed to minimize tariff exposure, improve supply chain resilience, and better serve global customers. Management expects 2026 tariff costs to be negligible, barring regulatory changes.
Key Considerations
This quarter marks a pivotal inflection point, with ONTO leveraging both organic innovation and M&A to expand its competitive moat in inspection and metrology. The company is navigating near-term demand volatility with a clear focus on long-term share gains.
Key Considerations:
- M&A Integration Risk: Realizing full value from the SemiLab acquisition depends on successful integration of teams, technology, and go-to-market channels.
- AI Packaging Ramp: The pace and breadth of AI packaging adoption will determine the magnitude of Q4 and 2026 upside.
- Tariff and Supply Chain Execution: Delivering on the region-for-region manufacturing plan is critical to margin recovery and customer responsiveness.
- Product Roadmap Execution: Timely delivery and performance of next-gen Dragonfly and Iris platforms are essential to defend and grow share in key segments.
Risks
Key risks include customer demand volatility, particularly in advanced nodes and AI packaging, as well as execution risk around the SemiLab integration and manufacturing localization. Tariff regulations remain fluid, and any changes could impact cost structure. Competitive pressure in inspection and metrology is intensifying, with incumbent displacement and technology leadership required to sustain share gains.
Forward Outlook
For Q3 2025, ONTO guided to:
- Revenue of $210 to $225 million, reflecting a temporary spending pause in advanced nodes.
- Gross margin of 53% to 55%, with tariffs expected to reduce margin by one percentage point.
- Operating margin of 18% to 21% and EPS of $0.75 to $0.95.
For full-year 2025, management expects:
- Q4 revenue to rebound to levels consistent with Q1 and Q2, driven by AI packaging and advanced node uptick.
Management emphasized:
- AI packaging demand is accelerating, with multiple customers and applications driving Q4 upside.
- SemiLab acquisition will be immediately accretive to growth and margin, with further upside from synergies.
Takeaways
ONTO’s strategic moves this quarter are reshaping its growth trajectory, with the SemiLab acquisition expanding both product breadth and margin potential. Near-term revenue softness in Q3 is a function of timing, not demand erosion, and the company is set up for a strong Q4 and 2026 as new platforms ramp.
- Portfolio Expansion: SemiLab adds scale and technology, positioning ONTO for leadership in next-gen metrology and inspection.
- AI Packaging and Advanced Node Tailwinds: Customer pull and new product wins support a sharp revenue rebound and sustained share gains.
- Execution Watch: Investors should monitor M&A integration, regional manufacturing progress, and continued product adoption as leading indicators for 2026 upside.
Conclusion
Onto Innovation is leveraging both organic innovation and targeted M&A to expand its addressable market, improve margins, and drive long-term growth. With a clear roadmap for Q4 recovery and 2026 acceleration, the company is positioned as a key beneficiary of AI packaging and advanced node investment cycles.
Industry Read-Through
ONTO’s results signal that AI packaging and advanced node investment are set to reaccelerate after a brief pause, with inspection and metrology providers that can deliver both performance and supply chain resilience best positioned for share gains. The SemiLab acquisition highlights the rising importance of electrical and materials metrology as device architectures grow more complex. Tariff mitigation and region-for-region manufacturing are now table stakes for global semiconductor tool providers, with operational agility and local presence becoming key differentiators. Investors should watch for similar moves among peers as the industry adapts to geopolitical and supply chain realities.