Onto Innovation Inc

NYSE:ONTO

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to the Onto Innovation First Quarter Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Sheaffer. Please go ahead, sir.

[Michael Sheaffer, executive]

Thank you, Connor, and good afternoon, everyone. Onto Innovation issued its 2021 first quarter financial results this afternoon shortly after the market closed. If you have not received a copy of the release, please refer to the company's website, where a copy of the release is posted. Joining us on the call today are Michael Plisinski, Chief Executive Officer; and Steven Roth, Chief Financial Officer.

As always, I need to remind you of the safe harbor regulations. Any matters today that are not historical facts, especially comments regarding the company's future plans, products, objectives, forecasts and expected performance, consist of forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These estimates, whether expressed or implied, are based on currently available information and the company's best judgment at this time. Within these is a wide range of assumptions that the company believes to be reasonable. However, it must be recognized that these statements are subject to a range of uncertainties that can cause the actual results to vary materially. Thus, the company cautions that these statements are no guarantees of future performance.

Risk factors that may impact Onto Innovation's results are currently described in Onto Innovation's Form 10-K report for the year ended December 2020 as well as other quarterly filings with the SEC. Onto Innovation does not update forward-looking statements and expressly disclaims any obligations to do so. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. As a reminder, a detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings release. I will now go ahead and hand the call over to Mike Plisinski. Mike?

[Michael Plisinski, executive]

Good afternoon, everyone, and thank you for joining our call this afternoon. Earlier today, we announced first quarter revenue of $169.3 million, which exceeded the high end of our guidance range, without any revenue associated with the pending approval of our license applications by the U.S. Department of Commerce.

We also raised our expectations for the second quarter, which, at the midpoint, represents 32% growth year-over-year and is well above our commentary from last quarter. In total, these positive revisions imply 26% increase in revenue for the first half of 2021 over the prior year, and we expect revenue in the second half of the year to be even stronger.

Our better results and outlook reflect the strengthening market demand in our core markets, but also the exciting progress we're making to expand our served markets. So let's begin with highlights from the first quarter, starting with our advanced node customers.

Demand for our optical 3D metrology systems by multiple logic customers more than doubled over the fourth quarter to support expansions below the 7-nanometer node. At these nodes, the complex interaction of shrinking geometries, new materials and the introduction of new 3D transistor structures is creating the need for additional metrology steps and additional measurements per step.

We believe this increase in capital intensity will favor Onto Innovation's proven metrology performance at optical speeds, which are orders of magnitude faster than x-ray. We see this value extending through the 3-nanometer node and have already received requests for second -- additional systems, had partner using our latest platform to develop that 3-nanometer process.

We believe our platform's configurable performance and cost ratio was a key factor in the decision by a top 3 logic manufacturer to select Onto innovation for optical metrology of the critical interconnect layers in the back end of line. This selection over an entrenched incumbent, is for our customers' next-generation product ramp, and we expect shipments to begin in the second half and carry through to 2022.

In addition to expanding our opportunities in existing markets, we are making great progress expanding our available markets, including the estimated $400 million planar films market. After shipping the first of our planar film systems in the fourth quarter, we've already booked an additional 7 tools for shipments to that customer in the second and third quarter of this year with follow-on orders expected in the second half of this year.

In addition, 3 more customers placed orders for our thin film solution with deliveries in the second half of 2021 and and with further expansions expected by all 4 customers in 2022. Similar advances are being made in the advanced packaging and specialty markets, which continued to experience strong growth from multiple well documented drivers in 5G, high-performance compute and AI.

As we guided last quarter, we see incredible -- we saw incredibly strong demand from advanced packaging customers, which resulted in growth of nearly 50% over the fourth quarter, offsetting an expected pause in the 5G expansions we experienced in the fourth quarter. The majority of the packaging growth was to support high-performance compute and memory devices where our inspection systems integrated with our AI classification software, is proving to be a critical combination for process control.

Our unique ability to leverage proprietary AI software to transform process control data streams into actionable intelligence has migrated from the mission-critical automotive market to these leading-edge devices where faster and more accurate decisions are crucial to not only detecting but also resolving process issues before impacting production. Similarly, our StepFAST solution for panel lithography has demonstrated a 2x gain in productivity, while simultaneously improving yield by employing sophisticated machine learning algorithms to optimize stepper performance.

In the first quarter, we received a repeat order for our StepFAST solution in excess of $6 million for delivery in the fourth quarter of this year. This order brings our backlog for lithography to over $20 million with additional orders expected in the quarter. In addition to the strong demand in our currently served markets, we're encouraged by the progress we are making in 2 new specialty device markets.

In the first quarter, we received several repeat orders ahead of plan from a top 3 CMOS image sensor manufacturer to support the ramp of their latest imaging device. We're seeing this demand because existing systems were unable to detect critical defects associated with the more advanced process.

For the year, we expect orders from multiple top-tier CIS suppliers totaling in the double digits. Likewise, progress with our newly acquired overlay metrology business is also going very well. We've already integrated our proven run-to-run software into the latest overlay product, which shipped to multiple compounds customer -- compound semiconductor customers in the first quarter. This new overlay solution will be fully released in the second half of the year and not only optimizes the lithography process, but also has the potential to improve cell productivity, a significant value proposition in an already constrained market, projecting a CAGR of 25% growth through 2025.

Now I'd like to turn the call over to Steve to discuss the first quarter financial highlights. Steve?

[Steven Roth, executive]

Thanks, Mike. And good afternoon, everyone. As I mentioned on our last call, we closed on the Inspectrology acquisition after our fourth quarter book close. So the first quarter of 2021 is the first quarter that includes the results -- include their results in our numbers. However, the overall amounts were not material to the quarter. As Mike mentioned, our fourth quarter revenue was $169.3 million, above the high end of our previous guidance, up 21% year-over-year and up 9% from the 2020 quarter.

Ticking down the revenue by market, 42% of sales were from our advanced nodes market with strength coming from logic, which more than doubled over the previous quarter. We also saw strong growth from DRAM customers, but that was offset by a weakening in NAND. Advanced packaging and specialty devices represented 37% of revenue in the quarter but was essentially flat overall with the previous quarter.

And finally, software and services represented 21% of revenue in the quarter. Our gross margins continue to stay strong at 54%, consistent with the fourth quarter. Product mix did impact the quarter, with over half of the sales volume increase over Q4 coming from established product lines. We expect to see continued improving margins in our new products, providing enhanced value to our customers, and the supply chain synergies that we've implemented from the merger begin to impact our product cost.

First quarter operating expenses were $49.2 million, an increase from $46.3 million in the fourth quarter. The increase was primarily due to operating expenses of Inspectrology operations and the reset of compensation related expenses, such as payroll taxes, that occur at the beginning of the year.

While we did experience an increase in operating expenses, our strong financial model resulted in an increase in our operating margin to 25%, well within our long-term operating model for these revenue levels. Our effective tax rate for the first quarter was 11% due to a higher-than-anticipated discrete tax benefit in the quarter.

We also expect several other discrete tax benefits to reduce the tax rate in the second quarter to between 8% and 10%. With the reduced Q1 and Q2 effective rates, we now expect our full year effective tax rate to be somewhere in the range of 12% to 14%. Net income increase in the first quarter and was $36.3 million or $0.73 per share and above the high end of our guidance. The 2020 4th quarter, we reported net income of $35.6 million or $0.72 per share.

Fourth quarter earnings was impacted by a benefit -- from the benefit of a low 5% effective tax rate, mainly due to a closure of an IRS audit. Moving to the balance sheet, which is on a GAAP basis, we had strong free cash flow of $47 million for the quarter or 28% of revenue.

We ended the quarter with a cash position of $393 million, up $19 million from Q4. And that's after approximately $26 million in cash used for the Inspectrology acquisition. Accounts receivable decreased in the quarter on higher revenues and better collections, improving our DSOs and ended at $142 million. Our inventory increased in the quarter to $201 million on the inclusion of Inspectrology's inventory, an increase in purchases for higher forecasted sales volume and an increase in the systems in finished goods awaiting shipment to China that require licenses.

Now turning to the second quarter guidance. We expect revenue to be in the range of $173 million to $184 million. Earnings per share in this revenue range is anticipated to be being between $0.76 and $0.85 per diluted share. We also expect that within this range, gross margins will be between 54% and 55%. Operating expenses, we have active recruiting plans in place for the strong growth we are seeing, we are also seeing an increase in other variable compensation expenses and currently anticipate operating expenses for the quarter to be between $51.5 million and $53.5 million.

Even with this new increased level of OpEx, we are confident we will continue to be operating within our long-term operating model as we grow towards our next benchmark of $800 million in revenue. With that, I'd like to turn the call back to Mike for additional insight into Q2 and 2021. Mike?

[Michael Plisinski, executive]

Thank you, Steve. I'd like to note that the guidance Steve provided for the second quarter does not include over $25 million in bookings that are pending license approvals from the U.S. Department of Commerce. Due to the uncertainty of timing of these licensing decisions, we will leave them out of future discussions until we have greater clarity. So clearly, the demand for semiconductor technology is strong and broad based.

The increasing number of connected smart devices drives both chip volume and data center growth to support explosion in data being generated by each device and enable greater remote work-life experiences. These data centers are becoming digital gold mines, and they are increasing the demand for high-performance compute engines to mine that data and transform it into valuable information.

The value of this information to the consumer then drives higher product adoption, thus creating a virtuous cycle. Onto Innovation sits at the center of this virtuous cycle, providing comprehensive process solutions to challenging metrology problems from 3D transistor formations to 3D and heterogeneous packaging, which is a key enabler for future product innovations. To that point, in the second quarter, we project the strongest growth to come from advanced packaging and specialty customers.

We see expansions from 5G and packaging customers, leading that growth. We expect DRAM revenue to increase for the fourth straight quarter and NAND revenue to hold steady, while logic revenue declines following a 2x surge from the first quarter. In summary, we see solid growth within our existing markets, and we're making great progress expanding into new markets such as the planar films and the CMOS image sensing market.

In addition, we're beginning to realize revenue synergies through our broader sales channels. For example, we currently expect to add over 8 new customers for our optical metrology suite by the end of 2021, simply by leveraging our existing inspection channels into the specialty device markets. Likewise, we're beginning to see the potential for revenue synergies with our overlay products and inspection systems outside of the compound semiconductor markets.

Each of these dynamics, many in the early stages of realization, contribute to our positive outlook for next year and into 2022. It's certainly an exciting time to be a part of Onto innovation, and I want to thank the entire team for their continued dedication to our customers' success. I also want to call attention to our first annual corporate social responsibility report for 2020, which is available on our website.

The report outlines several of Onto Innovation's ESG initiatives and our commitment to have a positive impact on our communities, the environment, both local and global, and our dedicated employees. Thank you. And Connor, we can now open the call for questions.

[Operator]

[Operator Instructions]

And we will take our first question, this will come from Craig Ellis with B. Riley Securities.

[Craig Ellis, analyst]

And congratulations on the strong execution in the first quarter. Mike, I wanted to start just by following up on one of the points you made earlier in your remarks and then came back to on your conclusion. You talked about an even stronger second half. And I was wondering, in the past, you've sometimes characterized year-on-year growth over a period encompassing 2 quarters like you've done with the first quarter of this year. Any color on magnitude of increase in the second half, either half-on-half or year-on-year? And if you look at the second half, would you expect revenues to rise sequentially through the year, or for different dynamics that you see, would you expect things to potentially peak in the third quarter? So that's the first question.

[Michael Plisinski, executive]

For what we see right now, we believe revenues will rise sequentially throughout the remainder of the year. So we expect Q4 to be stronger than Q3, and we expect Q3 to be stronger than Q2. So that's what we're seeing right now. Contributing to that is not just the general market dynamics, but also the expansions that we're making into some new markets for us, where we're seeing like I mentioned earlier, in the planar films, additional adoption there.

We've also mentioned the increasing backlog in lithography, which we began shipping those systems in the second quarter, in this quarter. And start to see revenue impacting in the second half. So -- yes, so that's what's giving us the confidence in the -- in our statement, which has improved since the last time we spoke in the second half -- in the strength of the second half. As far as [indiscernible] won't give you that.

[Craig Ellis, analyst]

Yes. Okay. Had to try. And nice to see the broadening customer traction in the thin film market. Just real nice momentum there. And then, Steve, for my second question, I'll ask one to you. So I just want to understand some of the dynamics that are leading to what looks like potentially a 70 basis point gross margin increased quarter-on-quarter in the second quarter.

Is that more from inter-segment mix, say, more of a sequential gain in software and services versus the first quarter? Are things going on inside of some of the segments, intra-segment mix? And then any color on what we should expect with gross margins as we look to the back half of the year and that strong demand environment that has good potential to grow quarter-on-quarter, as Mike just described.

[Steven Roth, executive]

Yes. Yes, I would say there was, again, when I go back to my remarks, when you analyze Q1, we did have -- we had, obviously, a nice growth quarter. But when you look at it, I think some of it was people expanding in line. We had existing tool sets versus some of the newer products that we've talked about that I think would add -- give some incrementally to the gross margin.

So it did have a kind of -- the incremental revenue was impacting with some older product lines that have healthy margins, but maybe not as good as we're anticipating with some of the newer stuff. Going forward, for sure, I think we'll -- you'll see the -- just the growth in the product mix.

We do have the lithography tools that are -- that Mike talked about, that will be starting to ship in Q2 forward. So they'll add a little bit of -- it will be a give and take to have a little bit of pressure on the margin there. But again, we'll have increased volume. So we think we can offset that and stay within our model.

But I'm pretty comfortable if you look at our model and these ranges up to $800 million, you're talking a tough -- our continued model between 54% and 55% through $800 million -- to the beginning of $800 million. And I think we feel pretty comfortable that we're going to be in those revenue ranges or in those margin ranges.

[Operator]

We can take our next question. This will come from Patrick Ho with Stifel.

[Patrick Ho, analyst]

Congrats on a nice quarter and outlook. Mike, maybe first off, in terms of some of the advanced packaging opportunities you're seeing both near-term and over the long term. Can you discuss whether some of the upside you're seeing right now is coming from increased capacity expansion plans from existing customers versus wins that you've gotten on new applications, whether they're on the high-performance computing side? You mentioned heterogeneous packaging. Can you just, I guess, kind of provide a little bit of color of the kind of the mix of increased capacity expansion versus new application wins on your end?

[Michael Plisinski, executive]

It's a little bit of a mix, and I don't have the exact split, but by new, in the last -- so a lot of the growth is what I would call new but it's not wins in a quarter or 2, it's wins from last year. Even 18 months ago, where we were installing systems to help customers develop some of these more advanced processes. Help them develop them, yield them and then work them into product designs.

So that's what now we're starting to see in both the DRAM and the advanced logic markets. And in the last few quarters, we've tried to highlight that with the share gains that we've anecdotally put together and described to the investors about our growth within the, let's say, the 5 IDMs, where they're driving a lot more dollars and a lot more R&D into advanced packaging, such as heterogeneous dye, such as 3D dye stack -- sorry, heterogeneous sort of fan-out packaging, substrate manufacturing or panel packaging as well as 3D stacking for high-bandwidth memory and TSV.

So we're seeing a lot of the expansions coming there. And we're seeing more devices being applied to that. So for instance, some of the foundry customers, they're having more demand for that advanced packaging technology also running through, and that's adding to our growth trajectory as well.

[Patrick Ho, analyst]

Great. That's helpful. And maybe as my follow-up question for Steve. You guys generated really good cash flow during the quarter. And our working capital management was particularly sharp, given a lot of the constraints in the environment. Can you discuss, I guess, some of the supply constraints maybe in the ecosystem and how that's impacting, one, your ability to build inventory and also just make -- ensure that you're able to deliver to the higher demand that's out there right now by your customers.

[Steven Roth, executive]

Yes. Thanks, Patrick. I mean, it's clearly something that -- it's industry-wide we're looking at. We're keeping a pretty good pulse on the overall supply chain from that perspective. We are seeing kind of vendor times stretch a little bit, especially in actually transportation side of it more than cargo, things that have come on cargo ships, we're starting to see expand a little out a little longer to get here.

But we're working that into our plans. So right now, we don't see a supply constraint with what we're doing, but we're obviously planning for the fact that we see the longer time stretching on some key components, especially coming from overseas. So yes, we're working those with the growth we're seeing, and we're planning accordingly. And we've got them built into the plan. So we don't expect any at this time.

[Operator]

Our next question will come from Quinn Bolton with Needham & Company.

[Quinn Bolton, analyst]

I'll offer my congratulations. Mike, I wanted to start on the planar film traction you talked about in the script. It sounds like you're seeing multiple systems at multiple customers. Can you just sort of give us a sense of the total number of planar films systems you expect to ship in 2021? Or perhaps a dollar basis? How much -- how significant is this to the overall business?

[Michael Plisinski, executive]

I think it's still in the early stages. So as far as significance, I would say, it's less than 10%, certainly less than 10% of revenue. I think for us right now, we're encouraged by that rapid adoption from the first top 3 customer. But then also the seeds that we're planting and the adoption we're seeing with other customers, that's all going to mean more expansions in the following year, 2022.

So I think for us, it's all about -- we're seeing a lot of growth rate and options from the markets. We're planting a lot of seeds for future growth, and then we'll see that become a much more significant part of our revenue stream. Just a reminder, we said that the overall market is $400 million in size, split between some critical films and then some more common films. And it's the common films we're going after right now.

So roughly $250 million or so. And so 20% of that is another $50 million. We would hope we could achieve maybe a little better than that going into 2022.

[Quinn Bolton, analyst]

Great. And then the second question I had is I think in the press release, you talked about the inspection business growing roughly 20% quarter-on-quarter. So the back end advanced packaging certainly feels like it's seeing good momentum. Your main competitor in that space sort of talks about seeing 80% growth in its inspection business in the first half of '21 versus the first half of 2020, so perhaps a different time base.

But wondering if you could give us your thoughts on just overall market share position in the inspection segment of the market, do you think you're keeping pace with your largest competitor there in terms of market share?

[Michael Plisinski, executive]

I think it depends on how you segment the market. So we're certainly extending our position at all of the leading edges. We've talked about that multiple times. That's -- I think we've got plenty of data points there. Where we're certainly struggling is in China. And I think that's an area that the competition is taking advantage of with the restrictions we have.

We've talked about significant amount of orders, pending licenses. That's what we have in hands. There's also the dynamic where many of the second-tier suppliers prefer to work with a non-U.S. option, non-U.S. non American company as an option. So there's some low-hanging fruit that the competition is taken care of there. I think that, that's a temporary dynamic. I believe that the what we're seeing from the commerce department, what we're seeing from Gena and the communications that there's a desire to find a way to work and not punish the U.S. equipment industry, which is so critical, to the overall growth and success of semi over the last several decades, really.

And so I think that, that's going to turn around. But we're happy with where we are and how we've been gaining share at all the leading edge and critical devices and the specialty markets as well.

[Operator]

And we will take our next question. This will come from David Duley with Steelhead Securities.

[David Duley, analyst]

Mike, I just want to clarify one of the statements you made earlier on, I think Craig was also asking about it. You mentioned the growth in the first half of the year versus the first half of last year, I think, was up 26%. And you made a reference how the second half growth would be stronger than the first half. Do you mean that the second half of this calendar year will be up more than 26% versus the first half -- or excuse me, second half of last year? Or just help me understand what you mean by stronger than up 26% in the first half.

[Michael Plisinski, executive]

That's a good question. So what I meant is it will be stronger than the revenue in the first half. So we see the second half as stronger than the first half of 2021.

[David Duley, analyst]

Okay. And as far as -- when you look at your, I guess, front end wafer business and metrology business, is it kind of -- we've heard from the big wafer fab equipment companies that the market is growing somewhere around 30% in calendar 2021. Do you think your metrology business will grow at a faster rate or a slower rate than that?

[Michael Plisinski, executive]

Let's see if I can see -- I think we're growing around that rate, I think there's opportunities for us to grow faster. It depends on timing of some of the adoptions of the new products we've talked about. Certainly, we're seeing some activity in the 3D NAND, which could drive accelerations in aspect, our channel home metrology tool that we -- right now, we're not seeing a huge impact in this year, more so next year. That could pull in, and that could change. But I think right now, that's -- the 30% number is reasonable.

[David Duley, analyst]

Okay, excuse me. And then I think generally, people have talked about unit volume growth of 12% or 14% this calendar year. And I suspect that, that will continue, given all the big wafer fab equipment investments we're seeing. If 12% or 14% is kind of a unit volume growth, what would you expect kind of annual growth to be for your back-end business?

[Michael Plisinski, executive]

Well, last year, our back-end business grew over 20%, and we think it's going to continue at those kinds of levels. The back end, what we're seeing for demand for our advanced -- the advanced equipment is -- it's pretty strong. And it's driven by a lot of different products, but also by those top IDMs that are that are migrating and now competing on the advances they're making in packaging. And you can hear it from nearly all of them.

TSMC has talked about it, Intel has talked about, Samsung has talked about it. So that's helping to propel this massive transition or demand we see for our advanced systems. And part of the advanced systems isn't just can we see the defect to measure it it's also what do we do with that data. And customers want fast decisions. They want that actionable intelligence so they can make adjustments to the process right away.

And that's what we're providing and have been providing to the automotive industry for better part of a decade. And now that whole value proposition is resonating very well with the advances in the high end here and more traditional semiconductor.

[David Duley, analyst]

Okay. Final question for me is, could you just elaborate a little bit more on your lithography business? You mentioned, I think, that you've picked up a double order and that your backlog is now greater than $20 million. Could you talk about the shipment of those tools? And what is the reason there -- so to speak, that everyone, all of a sudden wants to take ship delivery of panel lithography tools? What has changed in in the development processes of your big IDMs that has all of a sudden, that they're starting to order panel lithography tools?

[Michael Plisinski, executive]

Well, one thing we talked about is there's some -- and the reason we've had orders and been driving a backlog as there's there's customization. There's some new features and capabilities that we'll be announcing as part of these systems. So that's one thing. That's opening up the doors and capabilities into another aspect of panel, where we're seeing tremendous amount of, not just interest but ramping of volume production.

And that production is what we talked about early this year that we could see and count to volume moving, not just in 2021, but through the next several years, 2022, 2023. So we're seeing nearly -- well, every major large -- all the high-performance compute engines that we're seeing are moving towards this type of technology, this panel level packaging technology.

[David Duley, analyst]

As a follow-on to that, it sounds like you kind of have a broad base of customers that are going to take systems. The largest customer in this segment is the big foundry in Taiwan. And they did mention on their conference call, obviously, they've raised our CapEx like 3x in 3 or 4 months, but that they're going to spend 10% of the CapEx budget on the back end, which is roughly $3 billion. Do you see them adding a bunch of capacity and fan-out which will require a bunch of more litho systems this calendar year?

[Michael Plisinski, executive]

From a panel side, I would say they're not leading. But from the fan-out, to know what the info process and some of their other advanced packaging co ops, they're certainly investing heavily and gaining more customer demand for those products.

[Operator]

[Operator Instructions]

We can take our next question. This will come from Thomas Diffely with D.A. Davidson.

[Thomas Diffely, analyst]

First, Mike, a question on the $25 million of bookings that were booked but not shipped it's going to China. Is that -- have those been built and they're in inventory now? Or are they in process?

[Michael Plisinski, executive]

Some have been built in our inventory. That's -- we didn't expect such long delays. We did foresee a lot of growth and didn't want to double up in particular quarters, so having a whole influx hit all at once.

So we did build some. Now we're working with customers to manage through the build. So it's not the full amount. But I did mention it's over $25 million. So...

[Thomas Diffely, analyst]

Okay. But those could be reconfigured for other customers, worst-case scenario?

[Steven Roth, executive]

Yes.

[Michael Plisinski, executive]

Worst case scenario, yes. And we also got payments upfront because of the uncertainty. So...

[Thomas Diffely, analyst]

Okay. So Steve, you talked about lead times and supply challenges. Have your lead times changed at all for your tools going to customers?

[Steven Roth, executive]

No, not really, Tom. Yes, we've only just started to see some of this new commentary on shipping dates from the incoming, but we're not -- we're ramping for the volumes we're seeing, and we're not stretching out our lead times, anything per se.

[Thomas Diffely, analyst]

Okay. That's encouraging. And then finally, when you look at the software and services space, when you look at the projected growth over the next few years, is it more heavily weighted to software side or the traditional services side? And what might that mean for the margins?

[Steven Roth, executive]

So I would say some of that -- the growth is probably more on the services side and software. Software is kind of, I think, as you recall, we always kind of consider a steady eddy. It's got this nice progressive growth. But unlike the days prior to the merger, software isn't -- it isn't as big as the overall was to Rudolph. So its impact on the margins, while helpful, clearly. It doesn't really -- it moves -- it doesn't move the needle as much as it used to.

So I mean, I expect software to continue to grow. I think it will continue to enhance the margins, but we're talking a percentage of a percentage point impact on the overall margin. On the service side, I think we've seen some steady growth in the service over the last -- if you actually track back 1.5 years, service is just continuing to grow. We expect that to continue to grow, obviously, in this environment. And our service business overall is a pretty healthy margin business.

[Thomas Diffely, analyst]

Okay. And then I guess, finally, is the services business more leveraged to the advanced node products or the advanced packaging products?

[Steven Roth, executive]

Yes. Yes. To more of the advanced nodes, it's a bigger piece of our business. So yes.

[Operator]

I would now like to turn the call back to Mike Sheaffer.

[Michael Sheaffer, executive]

Thank you. We'd like to thank everyone for participating in the call today and for your interest in Onto Innovation. That concludes our remarks for the call. Connor, please wrap it up. Thank you.

[Operator]

Thank you. This concludes today's conference. Thank you for your participation. You may now disconnect.