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Onto Innovation's 57.6% Gross Margin: Can It Rise Further in Q4?
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Key Takeaways
Onto Innovation's Q3 gross margin rose to 57.6%, up 300 basis points from Q4 2025, driven by efficiencies.
ONTO's Q3 revenues surged nearly 90% year over year to $410 million, fueled by advanced packaging demand.
Onto expects Q4 gross margin above 58% and revenues of $430-$450M, with further gains in 2027.
Onto Innovation Inc. (ONTO - Free Report) continues to make progress in improving profitability, supported by operational efficiencies and strong demand across its product portfolio. In the third quarter of 2026, the company reported a non-GAAP gross margin of 57.6%, reflecting a sequential improvement of 60 basis points (bps). This represents an expansion of 300 bps compared with the fourth quarter of 2025, highlighting the effectiveness of its ongoing operational improvement initiatives.
The margin expansion reflects Onto Innovation’s continued focus on transitioning to an extended factory model, improving operational productivity and enhancing manufacturing efficiency. The company has benefited from operating in lower-cost labor markets, reducing exposure to duties and tariff-related risks, and localizing supply chains. These initiatives have also helped lower freight expenses by reducing the need to transport components across regions.
Strong revenue growth has accompanied these improvements. Third-quarter revenues reached approximately $410 million, increasing 19% sequentially and nearly 90% year over year. Advanced packaging and specialty device products recorded 35% sequential growth, supported by strong Dragonfly adoption and a recovery in power and specialty device inspection businesses.
Onto Innovation expects its gross margin expansion to continue in the fourth quarter. Management anticipates an additional 50-bp improvement, bringing gross margin slightly above 58%. This would represent a cumulative improvement of approximately 350 bps since the fourth quarter of 2025.
The company also raised its fourth-quarter revenue guidance to $430-$450 million, representing sequential growth of more than 7% at the midpoint. Operating margin is projected to reach 34% at the midpoint of guidance compared with 32.6% in the third quarter.
Management expects further gross margin expansion in 2027, indicating that an average quarterly improvement of approximately 50 bps is a reasonable expectation. However, rising component costs and supply-chain pricing pressures remain challenges. Onto Innovation is addressing these headwinds through design modifications, reduced memory usage and additional productivity improvements, while maintaining its focus on sustained margin expansion.
Taking a Look at ONTO’s Competitors
KLA Corporation’s (KLAC - Free Report) non-GAAP gross margin reached 62.7% in the first quarter of fiscal 2027, slightly exceeding the midpoint of management’s guidance. Non-GAAP operating margin improved 240 bps sequentially to a record 46.1%, driven by higher revenues and operating leverage. However, elevated memory component costs continue to pressure margins, while optics lead times and a less favorable business mix remain additional headwinds. For the second quarter of fiscal 2027, management expects non-GAAP gross margin of 62.5%, plus or minus 1 percentage point. Cost-reduction measures, memory optimization and pricing initiatives are expected to support a return to the 63-64% gross margin target by mid-to-late 2027 into 2028.
Applied Materials’ (AMAT - Free Report) margins are benefiting from value-based pricing, improved cost efficiency and growing demand for advanced semiconductor technologies. In the third quarter of fiscal 2026, non-GAAP gross margin expanded 150 bps year over year to 50.4%, marking the 13th consecutive quarter of year-over-year growth. Semiconductor Systems' non-GAAP gross margin increased to 55.4% from 53.5% a year ago. Non-GAAP operating margin improved to 34% from 30.7%, reflecting stronger operating leverage. The company expects fourth-quarter non-GAAP gross margin of approximately 50.4%, supported by a favorable product mix and increasing demand for higher-value AI-related applications, alongside continued cost improvements.
ONTO Price Performance, Valuation and Estimates
ONTO’s shares have gained 65.8% in the past year, outperforming the Zacks Nanotechnology industry’s growth of 53.3%.
Image Source: Zacks Investment Research
On a forward price-to-earnings basis, ONTO’s shares trade at 19.16X, higher than the industry’s 3.34X.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for ONTO has been revised upward for 2026 over the past 60 days.
View the Zacks #1 Rank List
Image: Bigstock
Onto Innovation's 57.6% Gross Margin: Can It Rise Further in Q4?
Key Takeaways
Onto Innovation Inc. (ONTO - Free Report) continues to make progress in improving profitability, supported by operational efficiencies and strong demand across its product portfolio. In the third quarter of 2026, the company reported a non-GAAP gross margin of 57.6%, reflecting a sequential improvement of 60 basis points (bps). This represents an expansion of 300 bps compared with the fourth quarter of 2025, highlighting the effectiveness of its ongoing operational improvement initiatives.
The margin expansion reflects Onto Innovation’s continued focus on transitioning to an extended factory model, improving operational productivity and enhancing manufacturing efficiency. The company has benefited from operating in lower-cost labor markets, reducing exposure to duties and tariff-related risks, and localizing supply chains. These initiatives have also helped lower freight expenses by reducing the need to transport components across regions.
Strong revenue growth has accompanied these improvements. Third-quarter revenues reached approximately $410 million, increasing 19% sequentially and nearly 90% year over year. Advanced packaging and specialty device products recorded 35% sequential growth, supported by strong Dragonfly adoption and a recovery in power and specialty device inspection businesses.
Onto Innovation expects its gross margin expansion to continue in the fourth quarter. Management anticipates an additional 50-bp improvement, bringing gross margin slightly above 58%. This would represent a cumulative improvement of approximately 350 bps since the fourth quarter of 2025.
The company also raised its fourth-quarter revenue guidance to $430-$450 million, representing sequential growth of more than 7% at the midpoint. Operating margin is projected to reach 34% at the midpoint of guidance compared with 32.6% in the third quarter.
Management expects further gross margin expansion in 2027, indicating that an average quarterly improvement of approximately 50 bps is a reasonable expectation. However, rising component costs and supply-chain pricing pressures remain challenges. Onto Innovation is addressing these headwinds through design modifications, reduced memory usage and additional productivity improvements, while maintaining its focus on sustained margin expansion.
Taking a Look at ONTO’s Competitors
KLA Corporation’s (KLAC - Free Report) non-GAAP gross margin reached 62.7% in the first quarter of fiscal 2027, slightly exceeding the midpoint of management’s guidance. Non-GAAP operating margin improved 240 bps sequentially to a record 46.1%, driven by higher revenues and operating leverage. However, elevated memory component costs continue to pressure margins, while optics lead times and a less favorable business mix remain additional headwinds. For the second quarter of fiscal 2027, management expects non-GAAP gross margin of 62.5%, plus or minus 1 percentage point. Cost-reduction measures, memory optimization and pricing initiatives are expected to support a return to the 63-64% gross margin target by mid-to-late 2027 into 2028.
Applied Materials’ (AMAT - Free Report) margins are benefiting from value-based pricing, improved cost efficiency and growing demand for advanced semiconductor technologies. In the third quarter of fiscal 2026, non-GAAP gross margin expanded 150 bps year over year to 50.4%, marking the 13th consecutive quarter of year-over-year growth. Semiconductor Systems' non-GAAP gross margin increased to 55.4% from 53.5% a year ago. Non-GAAP operating margin improved to 34% from 30.7%, reflecting stronger operating leverage. The company expects fourth-quarter non-GAAP gross margin of approximately 50.4%, supported by a favorable product mix and increasing demand for higher-value AI-related applications, alongside continued cost improvements.
ONTO Price Performance, Valuation and Estimates
ONTO’s shares have gained 65.8% in the past year, outperforming the Zacks Nanotechnology industry’s growth of 53.3%.
Image Source: Zacks Investment Research
On a forward price-to-earnings basis, ONTO’s shares trade at 19.16X, higher than the industry’s 3.34X.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for ONTO has been revised upward for 2026 over the past 60 days.
Image Source: Zacks Investment Research
Onto Innovation currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.