Conference Transcript - ONTO 2026-01-13

Charles Hsi, Analyst — Needham

All right. Good morning, everyone. Welcome to the 28th Annual Needham Growth Conference. My name is Charles Hsi. I'm the semi-cap analyst at Needham. Joining me on stage here is on to CEO Mike Plisinski. CFO Brian Roberts and IR Sidney Ho are also sitting in the audience. So Mike, once again, thanks for joining me today. Pleasure to be here. I heard that we're going to finally have a fireside chat this time. That really bothered you. You want to have a few slides to go through first. The next stage is yours.

Mike Plisinski, CEO

Thank you very much, Charles. So I just have about four or five slides just to kind of level set everybody on where we are, especially with this market and what happened during the year. So just to start, of course, the safe harbor. Remind everyone what I'm about to share is based on my best knowledge, yada, yada, subject to risk. Look them up, please. Now let's go into it. So I think everybody is starting with AI, right? AI is driving our industry right now. You've seen NVIDIA's comments about a 40% CAGR over the next few years. That's all on the demand side. Of course, the supply will be driven for us, will be driven by the expansions of factories, things like this. So super great backdrop for the industry, but what you may not realize is how tied we are directly to that AI supply chain. So if we look at just the 2025 revenue, about 61% of our revenue came from customers directly supporting the AI supply chain. So very tight tie. And because of that, and because of the exuberance or the more positive tone our customers are having in the last few months even, we're starting to see an outlook for 2026 that is about at least 10% stronger in the first half than our second half of 2025. So that's an improvement over the last few months where we said, yeah, it'll be stronger. and we kind of implied, you know, single-digit kind of numbers. So this is above. And then above that, we have the SDI or the semi-lab benefit. So additional growth on top of that. And we still believe that the second half is going to be stronger than the first half. So now where do we play in that AI value chain? Several areas listed here. I think none of these are a surprise, but we just wanted to level set everyone. So as far as the gate all around, gate all around node, we have the strong OCD position. We have growing position in the common films and, of course, opportunities to grow in the integrated metrology. And then you can see throughout these different markets where we're strong, leading an inspection for advanced packaging. Of course, the 2D macro inspection leadership with new opportunities now in 3D metrology, which were qualified at two of the three HBM memory manufacturers. So good progress there on the 3DI. And you can see right through here. But I did want to call out the co-packaged optics. Even though it's very small, I think there's really strong demand from the market for bringing this kind of technology online and there we have a very big position not in revenue but in the types of products serving co-packaged optics from specialized inspection to metrology and unique opportunities in 3DI metrology and by the metrology I mentioned first it's primarily films so films metrology and then 3D metrology so great opportunities there and then and that's all started through, let's say, late 24 through 25. Recently, we've expanded our opportunities for 26, and we're looking at critical films, something we've talked about. We think that's going to be more of a play in 26 with our critical films, our Iris G2 tool, as well as the 3DI metrology, which has been qualified at OSATs, HBM manufacturers, and co-packaged optics so photonics manufacturers we think that's going to continue to grow into this year and then charge metrology something new that came from the semi lab acquisition all told these opportunities add about another billion an opportunity with critical films being the biggest but let's go into a charge metrology so this is a new capability that we added with the semi lab and we talked about talk covering what synergies we see from the semi lab acquisition which we'll do in more detail at the next earnings call but I just wanted to give you a quick view of what this new technology is going to do for us so when you think about chiplet architectures we're involved in everything tied to the interconnects. So the measurement, the printing through our lithography capability and inspection of interconnects. That's what we do today. Whether it's RDL, TSVs, bumps, the interconnect technology for process control, we're very strong there. But what's happening in heterogeneous packaging or chiplet architectures is that residual charge so if you have a die and it goes through some plasma dicing a plasma edge it can pick up a charge and that charge can stay on the die typically designers have circuitry to dissipate these charges okay but when you're going to chiplet architectures the designers are saying no the package has to have that dissipation because we don't know what kind of chips you're going to be connecting together so customers like a TSMC have a very big concern about taking these potentially charged die putting them on a interposer or on another package and then having that charge go through as you can see here through the interconnects and damaging the die next to it and there's no way to measure that except through this technology so we think there's a big growth opportunity here as chiplet architectures become more and more prevalent the other area is in power semiconductors not super hot right now like AI but definitely a secular growth driver at least in our opinion here for compound semi manufacturing epitaxel is one of the most critical steps for the process, so for the device. So the EPI process aligns the crystalline structures. It's one of the biggest determining factor for the performance of that chip when it comes out through test at the final stages. So we do a lot of inspection and analytics on the crystalline structures, but we don't know which one's going to electrically fail, and the customer doesn't, until the very end. With this surface charge metrology capability, we're able to actually take our inspection data, feed it into them, into this tool, the charge metrology, and measure in those areas for the electrical performance of those chips, of those defects, to determine whether or not it's going to be a killer. And that's way up front in the process, so it's a significant advantage for our customers. So this is another, whoops, I didn't hit the plus. So this is another area of, you know, growth with this new charge metrology capability we have with SDI and how it fits in nicely with our portfolio. Now I mentioned inspection. I'm sure everybody's interested in inspection. What makes the Dragonfly so special? Why is everyone bugging me about dragonfly. Just kidding. So it turns out when I made this slide, my own team didn't know why we named the thing the dragonfly. So in nature, the dragonfly has the most eyes of any creature in nature. 30,000 eyes. And they reflect or they can capture multiple different wavelengths. They have different sections. These dragonflies have different sections for high speed acquisition and that kind of thing. So very diverse capability, which for our Dragonfly is very similar. So the Dragonfly capability we have today is much more than 2D inspection. Over the years, we've added a tremendous amount of sensors that solve a variety of applications for customers, both known and unknown. So applications that customers didn't realize they had until they start processing and ramping and then say holy moly we don't know how to you know measure under fill and how do we get this data well we have three different sensors when you combine those data streams we can give them exact accuracy for that so you can see here the number of new applications that we added in 2025 just on the dragonfly g3 so pretty pretty powerful pretty compelling, and that's why we've seen, you know, less of a loss or less of a drop in the Dragonfly business as we expected at the start of the year. Now, everybody's probably interested in an update on the new Dragonfly platform. So this will preserve all of the sensor capability that we had before, but significantly enhance our resolution. And it's a ground-up system you've heard me talk about on earnings calls, literally from the platform it sits on all the way up, the vibration isolation. And you can see here the, slide's a little off, but you can see here the performance improvement over the prior generation. So significant improvement in both throughput as well as resolution. So those ovals show you the resolution, where it is in a resolution perspective lowers better and where it is on throughput okay so or and then the competition so we get a lot of questions around the competition the competition is somewhere in between that so when you think is this a me too product line no it was designed to go after front end applications it was designed to be significantly more than what the packaging market needed because, frankly, a packaging market didn't need it some, you know, 18 months ago. And so we have a pretty compelling position here. The other thing everyone's asking is, you know, did we ship the tools we said? Yes, we did. And, in fact, we now have a purchase order from a fourth customer that we expect to deliver in the quarter, in this quarter, as well as several other systems that we expect to ship in the quarter. So already, we're seeing some significant traction on this new platform based on its capabilities, et cetera. One more. I know you're anxious to grill me. I'm not anxious. Last slide. So we talked a lot about revenue, about growth, about opportunities, but we haven't lost sight of the fact that we have significant opportunities to improve our operating margin. And it starts with gross margin, goes right down to the bottom line. We've done three things to help improve that. The first is the extended factories. So we talked about our move, our very aggressive move, to shift manufacturing over to our Asian partners. We've achieved, I think we said on the last call, about 50% of our production is now overseas. Target is around 80%. we should be able to achieve that or mid next year or mid this year sorry so in the next few months next two quarters so very good progress there we're at the point now where all products are being built over there so now it's a matter of optimizing and ramping the suppliers and it's going quite well the other area is the because of these new products these new applications we're able to deliver or more value for our customers and of course share in some of that value creation so we have higher margins on the products on the new products coming out and then we've always said that the SDI benefit the semi lab benefit is margin accretive out of the box so both from an operating sorry from a gross margin perspective as well as an operating perspective all told without counting any of the increased benefit from growth in our core products, these three areas will result in at least a 30% improvement in our operating margin, in our earnings, net income for this year, 2026. And that is my last slide.

Charles Hsi, Analyst — Needham

Thanks, Mike. All right. Let's go back to one comment you made 90 days ago. lifetime away. Yeah, lifetime away. You said 20% more AI packaging tool opportunities but you were characterizing that 20% as its initial discussion and over the last 90 days do you see that 20% more packaging tools, AI packaging tools that discussion has turned into firm orders and are you ready to raise the number maybe to hire no so we just shipped the tools they

Mike Plisinski, CEO

need to be qualified then we can raise so that the discussions were around potential needs helping us to make sure we had our supply chains ready to be able to deliver what could be expected three months ago we were talking single digits for first half growth obviously we're significant we're seeing some significant improvement to that so you can assume that there might be some benefit there in the packaging side but we wouldn't change any of the numbers until we get through the qualifications which are three to six months we have to look at the ramp timing those those are also changing and we need to look at

Charles Hsi, Analyst — Needham

those insertion points. Great, thanks. Maybe go back to the other thing that the first half of 26 versus the second half last year, that single-digit sequential half, not exactly half over half, but sequential single-digit growth, now you're expecting 10% plus. Some of that is packaging. What's the other part? What's driving the other part of the race?

Mike Plisinski, CEO

Yeah, advanced nodes. So it's primarily advanced nodes and packaging. So I don't have a breakdown, but I know gate all around was certainly a big one. We've seen some spending there. Packaging from HBM perspective, the Dragonfly demand is strong. The HBM orders we talked about from a 3DI perspective, one of those customers we've gotten the VPA, so we have some visibility now the others were working on still so I think the the growth we're talking about is pretty pretty much uniform but still

Charles Hsi, Analyst — Needham

driven a lot by AI both front-end and back-end got it got so maybe maybe we'll touch upon each of the the elements you just mentioned let me start from the COOS. As I understand that Dragon G5 qualification is very important. Can you kind of remind us where you are? I think you mentioned something, but it's more at a higher level. You talk about the fourth customer, but we specifically would like to know what exactly at the leading foundry with the the qualification has been going on and what's the next

Mike Plisinski, CEO

milestone and for us yes yep so what we've said publicly is three to six months which is a pretty accelerated qualification period driven by the customer we won't share any details beyond that now but internally and with the customer we've worked through the exact timing the exact layers the exact specifications they want to see demonstrated in order to prove out our process so that's going to all add up to be in that range we just talked about and each you know earnings call will be able to provide clarity as to our progress through that hopefully we're on the earlier end of that but three to six months is the comfortable place to be.

Charles Hsi, Analyst — Needham

So still some part around the middle part of this year?

Mike Plisinski, CEO

Yeah, we should be through those qualifications by the middle part of this year, if not sooner.

Charles Hsi, Analyst — Needham

Is it fair to say that the 20% AI packaging opportunity, you will be more comfortable committing to that number once the qualification with this particular customer is done?

Mike Plisinski, CEO

Yes, that would be a very fair statement to say.

Charles Hsi, Analyst — Needham

okay thank you the other interesting development right around co-op is OSET the two OSETs seems to be building out more of the co-op more involved in co-op yeah I know you guys started talking more about the OSET side of the AI packaging business can you kind of talk a little bit more about where so what's market position in OSAT, the two OSATs, leading OSATs, and what's the, how do you feel about the growth of the OSAT business, particularly in AI packaging this year, maybe even a little

Mike Plisinski, CEO

bit longer term? So I think the, there's a couple areas there. So there's the outsourcing of capability from TSMC to the OSAT, so TSMC can focus on areas that they're going to consider are more profitable, so some harder areas. That's driving some growth. And then there's the, let's say, other customers of TSMC that don't feel like they're getting enough attention, et cetera, et cetera. And they are looking at some OSATs to pick up some packaging capability. That drives another piece, and that's some different technology. We're benefiting from both, given that we're strong 2D supplier to the OSATs for decades the strength of our tools is generally more on the high end and all of these examples I just gave that's driving OSAT business today are high-end applications so the higher resolution the higher precision the capabilities of clear find etc in addition to that we talked I think two quarters ago maybe last quarter about being qualified now and getting volume orders from OSATs for 3D metrology so bump metrology which we didn't have before that was typically a competitor's area of strength so the new 3DI is proving compelling not just for the high-end latest HBM applications but also for OSATs and that's based on its throughput and the fact that we can add it to our dragonfly and provide a complete total solution stay on logic

Charles Hsi, Analyst — Needham

for for one more question you know one area I think you guys have talked that a little bit less I would say over the last year also lithography the panel level packaging that will just that system but you know we always still paying good amount of attention to that particular area because that your indirect customer as they go through their transformation their turnaround we think it's probably going to be a little bit more positive this year and maybe going forward and especially we're hearing more about image getting more of attraction among the A for AI packaging applications so mind if you walk us through like where you are where you how you think about the lethal business and maybe not just a lethal maybe dragonfly business in that at that particular customer directly or indirectly as well well we won't speak

Mike Plisinski, CEO

specifically to one customer they tend to get mad about that but what we'll say is that from a litho, well, from a process control perspective, let me sit back, from a panel perspective, for sure we see the markets heating up. We see a lot of excess capacity that had been there for three years starting to be taken up, and we're getting much more traction with customers looking at, let's say, funded investments now versus theoretical investments. So that's a positive. Since then, so in the last three years, we've also seen customers recognize the importance of inline process control. So as the panel market has evolved and gotten more sophisticated, moving down in lines and spaces, the need for inline process control, and the capabilities of Firefly, which was significantly more expensive than their existing tools which they just used for a spot check at the end of the line. That's become more critical, and we're seeing the metrology capabilities on the Firefly, like those sensors we talked about, as more interesting to them even than the inspection so there's a lot of opportunity and panel for both our process control as well as the jet step lithography so what makes a jet step so so interesting jet step with its very wide field optics is able to handle large packages without any stitching and that's a key key point for our customers The other advantage, and what makes it so expensive, is the wide-field optics are also very high resolution, so near one micron resolution, printing image resolution. So that's unique in the industry. No one has that capability proven and delivered. So that's an area that our Pace Lab has been really doing a great job, bringing in customers to run samples to learn from the partners we have there as well as our own equipment there both in the substrate as well as glass which glass we didn't talk about but that's the next evolution or maybe the first we'll see there's kind of two camps there but for sure we see the panel growing in opportunities enterprise servers are where they came from but we're seeing AI-driven opportunities from our customers as well.

Charles Hsi, Analyst — Needham

So you talk about over the last three years, right, that the access capacity was built probably during COVID for the panel-level packaging, advanced substrate, that side of the business. Where do you see today in terms of that capacity digestion? Are we closer to a point? Maybe the demand could pick up in the next 12 to 24 months?

Mike Plisinski, CEO

Yeah, definitely 12 to 24 months. Based on the conversations we have with customers, there's real plans. Now, remember the lead times are long on the steppers, which is good. But there's real conversations happening for funded expansions, not hope, you know, happening now. So actually over the last six months. And hopefully we'll start to see those discussions turn to firm orders and then expansions into next year. This year will also be, you know, okay. Got it. But the Firefly is the kind of upside. That's a tool where we're gaining a lot of traction. It's much cheaper, so it's easier to bring in. They can apply it to their existing lines, including R&D and Pilot. And again, the recognition how important inline process control is to these customers is becoming eye-opening.

Charles Hsi, Analyst — Needham

Got it. So maybe let's talk about memory. I think memory, it's two things for you, right? One is HBM packaging. The other is the front end, DRAM. And also, I would like to talk about NAND as well. HBM, first on HBM packaging, I think you were relatively early to call a little bit of a capacity overbuild. I think you caught that last year.

Mike Plisinski, CEO

That helped us.

Charles Hsi, Analyst — Needham

What's your view right now? Are we nearing the end of that digestion?

Mike Plisinski, CEO

or still some way to go so everyone knows a part of that digestion was tied to Samsung so you can look and and see if Samsung has been qualified by NVIDIA who's driving the biggest lion's share of HBM adoption right now in jury's out so you hear multiple multiple comments around that I'm I'm convinced that that will happen so that'll happen those tools will get digested or utilized and you know Sydney is highlighted the ASIC guys are getting more aggressive they can win some business there it's not all tied to Nvidia so and Samsung is well positioned for some of that so I think we'll see that occur but based on the discussions with the HBM customers I think there's meaningful levels of expansion at least at the other two that suggests we should see a nice year of

Charles Hsi, Analyst — Needham

growth in 2026 great growth that's what oh and you asked about the front end did you ask about the front end not yet but now please the DRAND and NAND the front-end business advanced node business yep where do you see them I you mentioned about clean room constraints but what's the current projection right now when do you think the business could pick up again the reason why I said again was I believe first half of the year memory was great then roughly in the summer it got a little bit quiet then then come back a little bit again towards the end of the year so that was the trajectory of your memory business especially on the DRAM side right what do you think how how this year will play out for DRAM and then maybe I'll ask you about NAND as

Mike Plisinski, CEO

well I think from what we're seeing it'll be more second half kind of mid to second half weighted based on factory expansions etc on the front end side for For HBM, we're already seeing demand growth there. The question really is around the magnitude. So when you look at these big numbers, about 40% CAGR, 20% growth, then you kind of bring that down to how much factory space is available, and you start to say, geez, it can't grow that much. There's just not enough capacity out there. That's what we're working with customers on now, trying to understand. They're looking also how we free up, how do we reallocate, et cetera. For us, any expansion is bigger now than it was. As we've added more common films, the OCD has always been very strong, so there's a very high position there. But we've added more common films, we've added more integrated metrology, so higher share, more applications there. So any spending there should be outsized benefit to us than it was certainly two years ago or even last year.

Charles Hsi, Analyst — Needham

Got it. Let me ask you about China. Your China exposure is relatively light compared with almost all your peers. I noticed. But it's probably good in one way, but it can be bad in the other way. Like, good in a way, like, it provides protection against geopolitically driven policy volatility. let's say. But, you know, we want both things, right? We want protection in bad time, but we want you to be participating in the upside in a good time. So how should you think about your China business? I think you started to talk a little bit more about China, but can you give

Mike Plisinski, CEO

us a little bit more like how you plan to grow? So I think there's two new elements to the strategy. One is the addition of the extended factories. So by moving manufacturing outside the U.S., we've significantly de-risked ourselves in the mind of our Chinese customers. And so we've seen much deeper engagement from the executives, even visiting our Pace Lab, you know, in looking at how they can expand with us and in fact one of the executives that visit us made a comment why haven't we been buying from you used to be our best customer you tell me so i think that that's going to be a positive side benefit of moving overseas the other piece was the sdi sdi has a pretty strong position in china manufacturers some of them are different than the customers we had So we'll be able to leverage those install bases to bring in some of our additional products and offer a broader portfolio to the customers in China. And because especially the surface charge metrology is so unique, you can only get it from us, that's going to be a great door opener, just like at Echo, the old Metal Pulse was.

Charles Hsi, Analyst — Needham

All right. Let's take some questions from the audience, please.

Operator

Thank you, Dan.

Charles Hsi, Analyst — Needham

That allowed me to repeat the question for webcast. So the question is about the value, how you quantify the value. Are you providing to areas like HBM and are you able to raise prices? So great question.

Mike Plisinski, CEO

It all comes down to step one. Can you see and solve the problem that they're having? So can you see the defects of interest? Can you make the measurements that are critical to them? And then, if you can, and do it reliably and repeatably, then the question is, can you do it with a better COO? And COO is going to be a price and a speed, the combination. So that's where we typically have a good advantage. So we might not be the cheapest price, but we can be much faster. And the new Dragonfly G5, if you saw it, it's almost double the speed of a G3. It's a significant improvement over a G3. and its sensitivity goes down so we can see much more plus we have all those other capabilities those other sensors so I think in that case that's a and the case of our metrology you know the iris platform the the critical films it's it's a matter of making that precision but then we'll be hopefully faster but definitely at a different price point than their alternative today so the CEO will be much better we've said it'll be meaningful improvement to margins so

Mike Plisinski, CEO

between price and cards one last question please what's the key

Charles Hsi, Analyst — Needham

differentiation that you think is sustaining your advantage yeah I think

Mike Plisinski, CEO

it's it's understanding the customers the markets I think it's the because of that understanding we know a lot of the challenges they have beyond the simple inspection piece that's that's one lane but they have many lanes they have to address when they're trying to release something through packaging through the final steps so I think that's one of our advantages 2d inspection has been an advantage with this new platform it'll continue to be an advantage so you know One of our competitors has a tremendous breadth in 2D inspection, tons of technology. A lot of it's not as applicable to the packaging world. And where we need to go, we understand. So the next step after this, we're already working on. So I think we have pretty high confidence. And it's not going to go down to 10 nanometer needs in packaging. but all the, you know, filtering out noise, dealing with high warp, dealing with crack, all these things are different problems that need to be solved on the same tool. That's, I think, a strength of ours. And customers want to work with us. I mean, they want to see an alternative.

Charles Hsi, Analyst — Needham

All right, thanks, everybody. That's the end of the session. Thanks, Mike.

Mike Plisinski, CEO

Thank you very much, everyone.