Onto Innovation (ONTO) Q3 2025: Dragonfly and 3Di Drive 18% Q4 Growth Outlook Amid AI Packaging Surge
AI-driven advanced packaging and new product adoption are sharply accelerating Onto Innovation’s growth trajectory into 2026. The company’s Q4 revenue guidance signals a robust rebound, fueled by volume orders for Dragonfly and 3Di technologies validated at leading HBM customers. With the Semilab acquisition set to close and offshoring ramping, ONTO is positioning for margin expansion and deeper integration into the AI supply chain.
Summary
- AI Packaging Demand Accelerates: Volume orders for Dragonfly and 3Di tools reshape 2026 growth prospects.
- Manufacturing Shift to Asia: Offshoring strategy targets cost reduction and gross margin expansion.
- Semilab Acquisition Nears Completion: Integration set to boost earnings and extend product portfolio reach.
Performance Analysis
Onto Innovation delivered Q3 results ahead of guidance midpoints, with revenue reaching $218.2 million and gross margins at 54% even after absorbing a one-point tariff impact. Operating margins of 21.1% exceeded the high end of guidance, reflecting disciplined cost controls and improved forecasting. Cash generation was a standout, with $83 million in operating cash flow—representing 185% cash conversion on non-GAAP net income—demonstrating strong operational leverage and working capital discipline.
Segment dynamics reveal a decisive pivot toward specialty device and advanced packaging, which contributed 52% of Q3 revenue and is projected to finish slightly above $500 million for the year. Advanced nodes, at 25% of Q3 revenue, are expected to double year-over-year, driven by record adoption of Iris films and integrated metrology platforms outside China. Software and services provided the remaining 23%, highlighting a diversified revenue base. Looking ahead, Q4 guidance calls for 15% to 21% sequential growth, primarily on surging Dragonfly system demand for 2.5D AI packaging, with advanced nodes and DRAM/logic seeing moderate improvement.
- AI Packaging Outpaces Legacy Markets: Specialty device and packaging revenue rebounded sharply and will anchor Q4 growth.
- Cost Structure Flexes with Offshoring: Over 30% of Q3 tools shipped from Asia, targeting 60% by Q1 2026 to mitigate tariffs and expand margins.
- Cash Generation Surges: $83 million in Q3 operating cash flow underscores strong execution and financial discipline.
Q4 is set for a step-function up in both revenue and margin, with the extra fiscal week adding $3 million in operating expenses but not diluting the underlying momentum in core markets.
Executive Commentary
"Our 3Di technology has successfully completed the full qualification process at not one but two high bandwidth memory customers in the quarter. Our 3Di technology demonstrated superior performance on smaller denser 3D interconnects, critical for next generation devices."
Mike Plisinski, Chief Executive Officer
"Operating margins of 21.1% exceeded the top end of our guidance range as we maintained our focus on variable cost control in the quarter. The team did an outstanding job generating cash in the third quarter as cash from operations increased sequentially to $83 million from $58 million in Q2."
Brian Roberts, Chief Financial Officer
Strategic Positioning
1. AI Packaging and Advanced Inspection Leadership
Onto Innovation’s 3Di and Dragonfly systems have become mission-critical in next-generation AI and high-bandwidth memory (HBM) packaging, with volume discussions underway following rigorous customer qualifications. The 3Di’s unique laser-based metrology, enabling pre-reflow bump inspection, unlocks new yield-improving process steps and is opening incremental applications in 2.5D and hybrid bonding.
2. Offshoring and Supply Chain Realignment
Manufacturing migration to Asia is accelerating, with over 30% of Q3 tools shipped from extended factories and a goal of 60% by Q1 2026. This shift is structurally reducing tariff exposure, improving supply chain flexibility, and enabling gross margin expansion as more production bypasses U.S. inbound tariffs.
3. Semilab Acquisition and Portfolio Expansion
The amended Semilab deal, now valued at $495 million, is expected to close imminently and be accretive to revenue and earnings in 2026. Excluding one small product line to satisfy regulators, the acquisition will enhance ONTO’s metrology and process control portfolio, deepening its presence in specialty device and advanced node markets.
4. Advanced Node Momentum Outside China
Advanced node revenue is on track to double year-over-year, with Iris films and integrated metrology platforms gaining traction at leading logic and DRAM customers. While near-term growth is weighted toward packaging, advanced node and specialty device opportunities are expected to accelerate in the second half of 2026 as customer capacity expansions materialize.
Key Considerations
Onto Innovation’s Q3 marks an inflection in both product adoption and operational agility, with multiple secular tailwinds converging for 2026. Investors should weigh the following:
- AI Compute Cycle Drives Tool Demand: Customers signal up to 20% more tool purchases for AI packaging in 2026, anchoring ONTO’s growth visibility.
- New Product Validation Unlocks Share Gains: Dragonfly and 3Di qualifications at multiple HBM and OSAT customers position ONTO as a first-choice supplier for next-gen packaging.
- Tariff Mitigation and Margin Expansion: Offshoring is structurally improving gross margins, with tariff impact expected to fade by mid-2026.
- Integration Execution Risk with Semilab: While the acquisition is strategic, successful integration and realization of synergies will be critical in 2026.
Risks
The primary risks are customer spending variability, especially around the timing of AI packaging and advanced node expansions, and the operational complexity of ramping offshoring and integrating Semilab. Tariff exposure persists in the near term, and customer adoption of new metrology steps is still in early phases, potentially leading to non-linear quarterly trends.
Forward Outlook
For Q4 2025, Onto Innovation guided to:
- Revenue of $250 million to $265 million (15% to 21% sequential growth)
- Gross margin improvement of 50 basis points, with tariffs still a 1-point drag
- Operating margins of 24% to 26% on $77 million in operating expenses (including $3 million from an extra fiscal week)
- EPS of $1.18 to $1.33
For full-year 2026, management expects:
- Organic growth with a stronger second half as volume orders for Dragonfly and 3Di ramp
- Gross margin expansion as offshoring mitigates tariffs
Management highlighted:
- Early customer signals for up to 20% more AI packaging tools in 2026
- Incremental revenue from new products in 1H26, with more meaningful ramp in 2H26
Takeaways
Onto Innovation is leveraging AI-driven demand to accelerate its shift toward high-value packaging and advanced node markets, supported by differentiated inspection and metrology solutions. Operational execution on offshoring and disciplined cost structure are setting the stage for margin expansion.
- AI Packaging and New Product Adoption Are Catalysts: Volume wins and customer validation of Dragonfly and 3Di underpin a step-change in growth visibility for 2026.
- Operational Agility and Cost Discipline: Offshoring, supply chain realignment, and tight cost controls are supporting both margin expansion and cash generation.
- Watch for Integration and Customer Ramp Timing: The pace of Semilab integration and customer adoption curves for new inspection steps will shape quarterly variability and long-term upside.
Conclusion
Onto Innovation’s Q3 results and Q4 outlook confirm its strategic pivot toward AI packaging and advanced node opportunities, with new product momentum and operational leverage setting the stage for margin and revenue expansion in 2026. Execution on integration and offshoring will be key to sustaining this trajectory.
Industry Read-Through
Onto Innovation’s strong Q4 guide and AI packaging wins highlight a broader inflection in semiconductor capex, with inspection and metrology suppliers increasingly critical to yield and process control in advanced memory and logic. The shift to offshoring and tariff mitigation is a blueprint for U.S.-based equipment suppliers facing similar cost pressures. The ramp in 2.5D and 3D packaging signals sustained demand for high-complexity process control tools, while the Semilab acquisition underscores the industry’s drive toward portfolio breadth and deeper integration with key customers. Investors should expect continued consolidation and technology differentiation as the AI compute cycle accelerates.