Veeco Instruments (VECO) Q1 2022 Earnings Call Transcript

Veeco Instruments (VECO 1.50%)
Q1 2022 Earnings Call
May 09, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Veeco Instruments Inc. corporate-hosted Q1 2022 earnings call. At this time, I'd like to turn the conference over to Anthony Bencivenga. Please go ahead, sir.

Anthony Bencivenga -- Head of Investor Relations

Thank you, and good afternoon, everyone. Joining me on the call today are Bill Miller, Veeco's Chief Executive Officer; and John Kiernan, our Chief Financial Officer. Today's earnings release is available on the Veeco website. Please note that we have prepared a slide presentation to accompany today's webcast.

We encourage you to follow along with the slides on veeco.com. This call is being recorded by Veeco Instruments and is copyrighted material. It cannot be recorded or rebroadcast without Veeco's expressed permission. Your participation implies consent to our recording.

To the extent this call discusses expectations about market conditions, market acceptance and future sales of the company's products, future disclosures, future earnings expectations or otherwise make statements about the future, such statements are forward-looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made, including as a result of the COVID-19 pandemic. These factors are discussed in the business description, management's discussion and analysis and risk factors sections of the company's report on Form 10-K and annual report to shareholders and in our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and press releases. Veeco does not undertake any obligation to update any forward-looking statements, including those made on this call, to reflect future events or circumstances after the date of such statements. During this call, management will address non-GAAP financial measures.

Information regarding such non-GAAP financial measures, including reconciliation to GAAP measures of performance, is available on our website. With that, I will turn the call over to our CEO, Bill Miller.

Bill Miller -- Chief Executive Officer

Thank you, Anthony. Good afternoon, everyone, and thank you for joining the call. Veeco delivered another solid quarter during challenging times. The Veeco United team is performing well, dealing with lingering COVID issues and navigating a difficult supply chain environment.

Today, I'll take you through our Q1 highlights and discuss our markets and technologies. John will provide a financial update and guidance, and then we'll be happy to take questions. Demand continued to be strong throughout the first quarter. We saw accelerated semiconductor order activity, which drove an increase in our backlog Our financial metrics were in line with or above the midpoint of our guidance.

From a top-line perspective, we achieved revenue of $156 million, driven by record semiconductor shipments, with contributions from laser annealing, advanced packaging lithography and EUV mask blank systems. Our solid execution led to non-GAAP operating income of $25 million and non-GAAP EPS of $0.38. We achieved cash flow from operations of $25 million and ended the quarter with $232 million in cash and short-term investments, up $7 million from last quarter. We recently published our first set of environmental, social and governance goals for 2022 and beyond.

We continue to improve transparency, diversity and inclusion and our environmental responsibility because we believe this makes us a stronger company for all stakeholders. We've been able to meet our financial targets for the first quarter and fulfill our customers' most critical demands. However, we are impacted by supply chain delays. Similar to our peers, we're not seeing an improvement in material lead times, which is impacting our ability to fulfill demand in a timely manner.

Nevertheless, despite the supply chain challenges, our previously provided full-year guidance is intact, and we are excited that 2022 will be a growth year. Switching gears to our markets and technologies. There are significant and lasting megatrends that drive our growth markets. We break them down into high-performance computing, mobility, transformation of the automotive industry, and the cloud.

These megatrends are as strong as ever, as evidenced by the continued pace of technological evolution in areas like artificial intelligence, early stage augmented and virtual reality, and electric vehicles. Our customers in all of our growth markets, semiconductor, compound semiconductor, and data storage, are making investments in equipment to add capacity to address these growing demands. Veeco is well-positioned with exciting products to address these growth markets as we progress toward our financial target of $800 million in annual revenue, which we shared last September at our Analyst Day. Looking specifically at our semiconductor market.

According to industry research from semi, wafer fab equipment spending is forecasted to remain strong, above $100 billion annually in both 2022 and 2023. Much of this spend is concentrated at the leading edge where Veeco has a strong position, helping customers add cutting-edge capabilities. Our world-leading laser annealing and EUV mask blank systems are gaining traction, and we expect to gain market share and grow faster than WFE. And as I mentioned earlier, we had a record revenue quarter with our semiconductor products.

In laser annealing, Veeco's largest product line, we're executing well with advanced node logic providers, where our systems are tool of record at current and next nodes. As an indicator of this demand, during the quarter, we again received multiple multisystem orders at the leading edge for our laser annealing systems. We continue to innovate and are working on advanced annealing solutions with shorter dwell times to enable our customers to use new materials and new geometries enabling additional steps and their next nodes. In addition to leading-edge logic players, a portion of our business includes trailing node customers who are adding capacity to address component shortages for a variety of applications, such as consumer electronics and the automotive industries.

Beyond logic, we've been working to bring our innovative laser annealing solutions to the memory market, and we're working with customers to introduce laser annealing to DRAM for their most advanced nodes. These engagements are progressing well as we perform against milestones, and we expect to have more to report in the coming quarters. Overall, our laser annealing business is growing as we win process steps and win new customers. Now looking at our advanced packaging lithography product line.

We continue to experience good traction in applications, such as flip chip bumping and fan-out wafer level packaging, driven by artificial intelligence and GPU production. For example, during the quarter, we had another multi-tool order from an OSAT for a high-volume manufacturing wafer-level packaging solution. Our AP litho product line is a key enabler for our customers as they seek to improve device performance. Switching gears to the EUV mask blank product line.

Our ion beam deposition technology has been identified as the technology of choice to deposit defect-free material to create EUV mask blanks. You may recall, last quarter, we announced a third customer has validated our technology over others by placing an order for our iron beam system as they enter the EUV mask blank market. We expect a strong year as customers add capacity to keep up with the adoption of EUV lithography. ASML is planning on shipping 55 EUV systems in 2022, and they're working on capacity expansion plans to ship 90 systems annually by 2025.

With approximately one of our systems required for every 10 to 15 EUV lithography systems, we currently size this market at three to five ion beam systems per year. As we continue to work with the EUV ecosystem and innovate our product line to improve performance, we'll be ready for the industry's next steps, such as high numerical aperture EUV lithography. All in all, our semiconductor business is performing quite well and driving Veeco's growth in 2022 and beyond. Looking now at our compound semiconductor market.

We serve this market primarily with two product lines: our wet processing equipment, which can be used in a variety of applications; and MOCVD equipment for power electronics and photonics applications. We had a strong shipping quarter with our wet processing equipment as customers added capacity for RF devices. This product line has wide appeal, and we're starting to see adoption of wet processing systems in advanced photonics applications like microLED and augmented and virtual reality. Our gallium nitride and arsenide phosphide MOCVD systems enable several compound semiconductor applications, including power management solutions and photonics.

These applications have promising growth potential, and we're looking to build our presence in these emerging markets. During the quarter, we shipped systems for microLED applications like AR/VR, as well as GaN power electronics. These early stage wins, along with evaluations we have underway for power electronics and microLED, increase our confidence will grow in these emerging compound semiconductor markets. Our third major market is data storage.

Hard disk drive exabyte capacity shipped is expected to grow for the foreseeable future as hyperscalers and enterprises upgrade their storage capabilities. This corresponds to an increase in hard drive capacities and overall number of heads shipped. Based on discussions with customers, we forecast data storage equipment shipments will grow in 2023 after an absorption period this year. Now let's review our 2022 priorities.

We continue to be optimistic, given today's healthy demand environment, coupled with our strong backlog position. As always, our first priority is to keep our employees healthy and safe and maintain the progress we have been making on our culture so we can maximize our potential. As mentioned earlier, our commitment to our culture and stakeholders was strengthened recently as we released a comprehensive set of ESG goals related to climate change, product responsibility and diversity and inclusion. We're maintaining our focus on converting our evaluation systems into ongoing business, managing our supply chain and improving our on-time delivery for customers.

This focus is paying off, enabling solid first-quarter results. We're on target ramping our new San Jose manufacturing facility, which we expect to complete by Q3 of this year, and we're advancing our R&D efforts to innovate new products and deliver new evaluation systems to customers. Lastly, despite the near-term supply chain challenges being experienced across the industry, given our strong demand and robust backlog, we expect to grow revenue in 2022 and deliver on our previously provided annual guidance. With these priorities in mind, we're committed to making a material difference and building a stronger Veeco that serves all our stakeholders.

With that, I'll turn it over to John.

John Kiernan -- Chief Financial Officer

Thanks, Bill, and good afternoon, everyone. Today, I will be discussing non-GAAP financial data and would encourage you to refer to our reconciliation between GAAP and non-GAAP results, which you can find in our press release or at the end of the quarterly earnings presentation. Turning to Q1 revenue by market and geography. Revenue totaled $156 million for the quarter and was driven by strong sales to our semiconductor customers, which increased 50% from Q1 2021 and made up 49% of our total revenue.

Contribution came from all of our major semiconductor products, laser annealing, advanced packaging lithography and EUV mask blank systems. The compound semiconductor market contributed 24% of our revenue and increased 50% from Q1 2021. This was driven by system shipments for 5G RF, photonics and power electronics applications. Our data storage market came in at 14% of total revenue.

And finally, the scientific and other market made up 13% of our revenue. Now looking at quarterly revenue by region. Our Asia Pacific region, excluding China, made up 37%, driven primarily by semiconductor systems sales. The United States was 30% of our total revenue, driven broadly by sales to semiconductor, compound semiconductor and data storage customers.

China made up 19% of total revenue, primarily driven by sales to semiconductor and compound semiconductor customers. And finally, EMEA was 14% of total revenue for the quarter. Switching gears to our non-GAAP quarterly results. Gross margin came in at 43.1%, which was up from Q4 and in line with guidance.

It should be noted that we expect quarter-to-quarter variations in gross margins due to the influence of a number of factors. And while gross margin for the quarter benefited from a favorable product mix, we're experiencing cost increases in a number of areas, such as components, freight and logistics, and labor. Operating expenses for the quarter were $43 million, an increase of $3 million from Q4 as we make investments in headcount to support growth and as inflationary factors began to impact the P&L. Tax expense for the quarter was approximately $500,000 with net income coming in at $22 million.

And EPS was $0.38 on a diluted share count of 64 million shares. Effective January 1, 2022, we adopted ASU 2020-06, which changed the accounting for our convertible notes. Among other changes, the if-converted method of accounting for the outstanding diluted shares is now required. As a result, for the purposes of the EPS calculation, the diluted share count is computed as if all the outstanding convertible notes were converted into common shares and net income is adjusted to add back interest expense from the convertible notes unless the results will be anti-dilutive.

We provided a table in the press release and backup section of the earnings presentation that illustrates the EPS calculation in detail. Now moving to the balance sheet and cash flow highlights. We ended the quarter with cash and short-term investments of $232 million, a sequential increase of $7 million. This was driven by cash flow from operations of $25 million, which was offset principally by two items: first, capex of $10.9 million, $8 million of which was used for the new San Jose facility build-out; and second, withholding tax payments on restricted share vesting.

From a working capital perspective, our accounts receivable decreased to $99 million. And DSOs for the quarter came in at 57 days, down from 64 in the prior quarter. Accounts payable increased sequentially to $56 million with the corresponding increase in days payable to $57 million. Inventory was $179 million and days of inventory came in at $1.74, both a slight increase from the prior quarter.

Long-term debt, including the current portion of $20 million, was recorded at $274 million on the balance sheet and represents the carrying value of our $278 million in convertible notes. The increase in long-term debt, including the current portion from Q4 2021, is due to the adoption of ASU 2020-06, whereby the convertible notes are no longer separated into debt and equity components and are now solely recorded as debt on the balance sheet. Now turning to Q2 non-GAAP guidance. While our demand is quite strong, we have not seen an improvement in inbound material lead times.

In this supply constrained environment, we expect Q2 revenue to be between $150 million and $170 million. And with less favorable product mix and current inflation driving up material logistics and labor costs, we expect gross margins to be between 40% and 41%. We expect opex to be between $44 million and $46 million. Net income is expected between $12 million and $19 million.

EPS is expected between $0.22 and $0.34 per diluted share and is based on 64 million share count. Please refer to the schedule in the guidance section of the earnings press release and backup section of the earnings presentation, which illustrates how Q2 EPS is calculated based on the guidance ranges provided. And now for some additional color beyond Q2. We are operating in an environment with strong demand for our products, and we have a robust backlog.

Although supply chain challenges persist, we are reiterating our previously guided full-year revenue range of $640 million to $680 million and diluted non-GAAP EPS range of $1.50 to $1.70 per share. And with that, Bill and I will be happy to take your questions. Operator, please open the line.

Questions & Answers:

Operator

Thank you. [Operator instructions] And we'll go to Patrick Ho with Stifel. One moment, please. Please go ahead, Patrick.

Your line is open.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Can you guys hear me?

Bill Miller -- Chief Executive Officer

I can hear you fine, Patrick.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. Congrats and commend you guys for the execution in a challenging environment. Bill, maybe first off, in terms of the semiconductor business and, in particular, LSA. It was really encouraging to hear the progress you continue to make on the DRAM side of things.

From an application standpoint, are these DRAM opportunities similar to the ones that you saw in logic? Or are there new opportunities, new applications on the DRAM side that kind of expands the reach of LSA?

Bill Miller -- Chief Executive Officer

Yes. Thanks for the question, Patrick. I would say, yes, we are making continuous progress in the laser annealing space and in memory. As you know, we've engaged with a leading memory customer.

We continue to make progress. And I would characterize it as quite a successful evaluation program we have going on. We are actually being evaluated for a few different steps. One of them is similar to our bread and butter logic annealing step.

But then there are other applications that are specific to memory. So there are a number of opportunities there for us over a longer period of time.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. that's helpful. And as my follow-up question, maybe for John. I know there are a lot of moving pieces right now in the supply chain, lockdowns, labor availability, freight and logistics.

So kind of throwing them all into the kind of the same bucket. What is the biggest issue that you're confronting in the June quarter? Is it the supply chain? Or are there other types of issues that -- like freight and logistics being extremely high right now. What's the biggest issue? And maybe from a gross margin perspective, could you quantify how many, I guess, basis points is having an impact at least for the June quarter?

John Kiernan -- Chief Financial Officer

Yes. Thanks for the question, Patrick. So yes, looking at the June quarter, lead times are still stretched and we've yet to see improvement. And of course, our guide for revenue and gross margin for Q2 incorporate the current supply chain challenges.

I would say revenue could be higher if there were no supply chain constraints. And we've built into our gross margin guide, Patrick, about 200 basis points for the impact of higher logistics, labor, and material costs. We built in initially when we were planning for the year about 100-basis-point impact. I would say the area that was immediate and surprising and impacted by war in the Ukraine and COVID shutdowns in China, how drastically again in Q1 and what we're projecting into Q2 on freight and logistics costs there, Patrick, quicker than we can pass them on to customers at this point.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. That's really helpful. Thanks again, guys.

Bill Miller -- Chief Executive Officer

Thanks, Patrick.

John Kiernan -- Chief Financial Officer

Thank you, Patrick.

Operator

We'll go next to Brian Lee with Goldman Sachs.

Miguel De Jesus -- Goldman Sachs -- Analyst

Hey, everyone. This is Miguel on for Brian. I just wanted to follow up on the discussion on margins. How should we think about the margin cadence through the rest of the year? Is 2Q the bottom? Or I guess, what does your guidance sort of embed in terms of how the supply chain and the logistics and also the mix impact, how those kind of flow through the rest of the year? Thanks.

John Kiernan -- Chief Financial Officer

Sure, Miguel. Thanks for the question. So Miguel, we still feel that the range that we provided as a target for this year of 42% to 44%, that range is achievable for 2022. Our current view is that Q2 would be the lower gross margin quarter, given the supply chain impact that we spoke about but a less favorable product mix in Q2.

Miguel De Jesus -- Goldman Sachs -- Analyst

OK. That's very helpful. And also appreciate the extra -- the color on, I guess, the relative impact on -- you talked about the 200-basis-point impact as it relates to the supply chain and the logistics and the cost inflation. So just taking the midpoint, the guidance for the second quarter.

Is the right way to think about it is -- I'm trying to measure the impact of the mix. It sounds like it's like a little less than 100 basis points is the impact of the mix shift. Is that the right way to think about it?

John Kiernan -- Chief Financial Officer

Yes. I would say, Miguel, in the 100 to 150 basis points that you can attribute to mix there in Q2. And I would say -- I'd probably just add, Miguel, as well. So we're taking a number of efforts, right, to offset the impact of the supply chain additional costs.

We've been working on various -- for more than a year now with teams on gross margin improvement. And one of our focus now in this current environment is looking at the ability to increase prices where we're adding value. But I would say that when we get immediate cost increases, like freight, logistics, and some of these things that hit us immediately and we're working with nine months or so of backlog, price increases will have an impact later on down the road. We're not taking a position of looking at current backlog and trying to renegotiate prices on the backlog with our customers.

Miguel De Jesus -- Goldman Sachs -- Analyst

Awesome. That's very helpful extra color. I'll pass it on. Thanks.

John Kiernan -- Chief Financial Officer

Thanks, Miguel.

Operator

And we'll go to our next question from Rick Schafer from Oppenheimer.

Rick Schafer -- Oppenheimer and Company -- Analyst

Thanks, guys. Semi and compound semi are off to a pretty good start. 50%, if I heard you correctly, on both those segments. I guess a couple of questions.

First, I was curious, maybe, John, if you could help us understand what's going on with mix. Just a little more granularity in 2Q, sort of give us a sense of which products or segments you expect to lead and which ones you expect maybe to lag a little. And as part of your answer, I'd be curious if some of the lagging segments are -- if that's really supply related, if you would expect maybe some of those lagging segments to reaccelerate in the second half.

John Kiernan -- Chief Financial Officer

Yes. So Rick, so we've been working to normalize our gross margins from product to product, so more in line with the company average. And we've made great progress there. But having said that, we do occasionally have a mix impact to our gross margin on a quarter-to-quarter basis.

Q1 was a situation where we had a few high gross margin shipments that led to a slightly higher gross margin for the quarter. And I think it's worth noting at the revenue levels that we're currently at and having tool selling prices and some of our products $6 million, $8 million, even $10 million range, just a couple of products different from quarter to quarter could impact the gross margin mix in the range that we're talking about. I would say it's not really market-driven. We actually expect increases in revenue from the semi market in Q1 -- in Q2 from Q1 and flat in data storage and compound semi quarter on quarter.

So it's really not a mix in the market changing. But I would also say in our Q2 guide that we have a couple of eval system signoffs where there's special pricing that we expect to close out in Q2. So that has a bit of an impact there as well.

Rick Schafer -- Oppenheimer and Company -- Analyst

Thanks a lot, John. And then maybe you kind of teed up for my next question. You've talked about the last couple of years being sort of kind of out there with, I think, 10 eval tools on average. And I'm just curious if that's the new normal as we kind of look forward for the next couple of years for Veeco.

I mean, obviously, it seems to be bearing fruit in terms of design wins, revenue momentum, all that stuff. So yes, I guess I'm curious as I think we saw like some of the EV and wet processing wins even most recently. I didn't know if as those evals roll off and you deploy, are you going to deploy new eval tools elsewhere to kind of fill that so we kind of stay at that 10 tool kind of rough number? Is that kind of a new annual, I guess, for a while?

Bill Miller -- Chief Executive Officer

Yes, Rick. I would say it's if it's not broken, don't fix it. And we are now kind of up at 10 kind of range, plus or minus a couple. And as we have evals being signed off, we're kind of loading the gun behind it in terms of next-generation products.

So as these signoffs start to happen, we do have some new products and new technologies that are going to be coming out in the coming quarters. So we are going to keep at this elevated level, really kind of more focused primarily in semi and secondarily in compound semi with our eval program.

Rick Schafer -- Oppenheimer and Company -- Analyst

Thanks a lot, Bill. Congrats.

Bill Miller -- Chief Executive Officer

Thank you.

Operator

And we'll go next to Tom O'Malley with Barclays.

Adam Bistritzky -- Barclays -- Analyst

Hi, guys. This is Adam on for Tom. I appreciate the color you gave on -- you just mentioned the semi being up quarter over quarter along with DC and compound semi flattish, if I heard that correctly. Just maybe how can we think about the back half of the year in terms of cadence by segment? If you'd be willing to give some color there, that would be helpful.

Thank you.

John Kiernan -- Chief Financial Officer

Sure, Adam. So what we had said and we're reiterating our guide, so there's no significant changes there. If we're looking at a full-year guide in the $640 million to $680 million range in revenue and you take $660 million toward the middle, our expectation is that semi for the full year will be up about 40%, that we expect compound semiconductor to be up about 35%, and we expect the data storage business to be down about 4%, and scientific in the range of flattish. So that's still our expectations.

We've bumped up the semi growth rate up a bit from our previous rate of 35% to 40% now currently.

Adam Bistritzky -- Barclays -- Analyst

Thank you. That's very helpful. And if I could add one more. I know you guys alluded to WFE for this year and next.

But I guess with expectations moving closer to $90 billion, I guess, from $100 billion or at least inching toward that direction and potentially down next year should we see some sort of correction. Have you considered that downside scenario? And if you have, how would that impact you guys? Or theoretically, how would you kind of expect to be impacted by that kind of outcome?

Bill Miller -- Chief Executive Officer

Yes. I would say not so much. I would say right now, our demand in the semi segment is particularly strong. I think our Q1 revenue was up year over year 50%.

Our backlog has doubled. We actually -- about 50% of our revenue in Q1 was semi with record shipments. So I would expect that trend to continue. And I think certainly, the industry is probably more supply constrained working in a supply constrained environment, if you will.

But whether WFE is $100 billion or $90 billion, it's important to know that we are a very small piece of WFE. Our growth story is really all about winning new applications and getting new products out in the field. And so in this area, I would say we are performing better than the strategy we developed three years ago. So I would say -- and it's very much focused on front-end semi applications, leading -- excuse me, leading node applications.

And we think that the investments will continue at the leading edge. So I think we're not overly concerned about a $10 billion change in WFE.

Adam Bistritzky -- Barclays -- Analyst

Makes sense. Appreciate it, guys.

Bill Miller -- Chief Executive Officer

Thanks, Adam.

Operator

And we'll move to our next question from Gus Richard of Northland.

Gus Richard -- Northland Securities -- Analyst

Yes. Thanks for taking the question. I just want to ask you about the supply constraints. There's been two major macro issues, the war and these lockdowns in Shanghai.

And just wondering if you could sort of beyond logistics and freight, how are you -- how is that -- those events manifesting in your supply chain? What -- is it causing problems with components? Is it -- can you not get the right metals for tools? Can you talk a little bit more about how it's impacting you?

John Kiernan -- Chief Financial Officer

Sure. Sure, Gus. So I think what we're seeing is really no improvement to these sort of stretched out lead times that we've seen over the last few quarters. So the type of components, chip shortages, certain shortages in vacuum components, even O-rings and valves and things of that nature, we just really haven't seen an improvement in the lead time.

With the lockdown in China, perhaps. We don't source a lot directly, so we don't see immediate direct source. But if our OEMs or suppliers lowering a tier, get certain components from supply chain in China, I guess that would certainly have an impact. So we're doing the same activities that we've been doing over the last number of quarters, staying very close to our suppliers.

If a supply chain issue or component issue or shortage or an allocation comes our way, we work extremely diligently with the suppliers to try to alleviate that. So really not seeing anything different there in terms of sort of the war in Ukraine or shutdowns in China. Maybe Bill wants to add something.

Bill Miller -- Chief Executive Officer

I would just add that right after the Ukrainian war started, we did an assessment of our supply chain, and we found that xenon gas is largely made and developed in Russia. So we actually use it inside of our labs to run some equipment. And so we just sourced over a year's worth of xenon gas and have it sitting available. But I think the ripple of the China shutdowns and the ripple through the supply chain is going to take some time to impact us.

Gus Richard -- Northland Securities -- Analyst

Got it. So at this point, it sounds like it hasn't gotten incrementally worse. Is that correct?

Bill Miller -- Chief Executive Officer

Yes. I think John mentioned it was probably about $10 million to $15 million headwind to revenue for this quarter. It's certainly an impact.

John Kiernan -- Chief Financial Officer

Yes. It's more of the timing of the materials coming in and being on allocations, which we hear is sort of common at this point to certain materials and components.

Gus Richard -- Northland Securities -- Analyst

Got it. And then just in terms of the --

John Kiernan -- Chief Financial Officer

That being said -- I'm sorry, Gus. 

Gus Richard -- Northland Securities -- Analyst

No, go ahead.

John Kiernan -- Chief Financial Officer

I was just going to add, that being said, we, for the last couple of quarters, have been putting more materials on order earlier. So we do expect sort of the pace of materials, given the fact that we've been working on this a number of quarters now, for the pace of materials in the second half of the year to increase over the first half of the year.

Gus Richard -- Northland Securities -- Analyst

Got it, got it. I understand. And then just turning to the data storage business. The lead times in that business are clearly long and should be starting to get a little bit of visibility into 2023.

Can you qualitatively talk about what your drive customers are thinking? Is it going to be -- what sort of recovery off of this year are you going to get?

Bill Miller -- Chief Executive Officer

Yes, I would say we are definitely seeing -- I guess, qualitatively, I would say the order activity discussions we're having are clearly increasing. And I would say if I kind of look backward a year, I would say the funnel of projects has increased significantly. And so those are all positive signs. I think it will take probably another quarter or so to get that totally into confidence in that.

But I would say we are clearly seeing an uptick in order activity -- or order discussions, excuse me.

Gus Richard -- Northland Securities -- Analyst

Got it. All right. I'll hand it over. Thanks so much.

Bill Miller -- Chief Executive Officer

Thanks, Gus.

John Kiernan -- Chief Financial Officer

Thanks, Gus.

Operator

And we'll hear next from Mark Miller with Benchmark Company.

Mark Miller -- The Benchmark Company -- Analyst

I believe you indicated you expect two eval tools to be included in revenues next quarter. Is that correct?

John Kiernan -- Chief Financial Officer

Yes. We said we are expecting eval signoffs next quarter, and we've included that in our revenue guide. That is correct, Mark.

Mark Miller -- The Benchmark Company -- Analyst

And how many eval tools remain there until those two are signed off?

Bill Miller -- Chief Executive Officer

At the moment, after those two are signed off, it's probably down in seven-ish range, I'd say. But I think we're also going to be potentially putting some more on, and I think it might just be a matter of a month or two to be offset. So I would say it's probably more like 8 to 10 on average. And just with these signoffs, they're coming down a little bit.

But they'll be -- the plan is to replace them.

Mark Miller -- The Benchmark Company -- Analyst

And all these tools will be revenued in this year?

Bill Miller -- Chief Executive Officer

There are typically one-year evals after installation. So the typical installation could be as much as, say, three months. So they're typically 15-month evaluation. So many of these that are coming on will not be revenued in the year.

John Kiernan -- Chief Financial Officer

So on an overall year basis, Mark, we expect about a handful of tools to be signed off this year into revenue and a handful of new evals to ship out. They won't be offset exactly in the same months or quarters. But I mean that's a rough order of magnitude.

Mark Miller -- The Benchmark Company -- Analyst

You indicated too that you had a couple of microLED shipments. Was this for development systems? Are you starting to see production orders?

Bill Miller -- Chief Executive Officer

We are -- these are I would characterize for -- as pilot line activity for the disruptive microLED approach of 200- and 300-millimeter GaN-on-silicon applications.

Mark Miller -- The Benchmark Company -- Analyst

Thank you.

Bill Miller -- Chief Executive Officer

Thank you, Mark.

John Kiernan -- Chief Financial Officer

Thanks, Mark.

Operator

[Operator instructions] And we will go to David Duley of Steelhead Securities.

Dave Duley -- Steelhead Securities -- Analyst

Good evening. Just a couple of questions from me. I was wondering on the EUV mask blank space. You've done really well there being the tool of record for creating these masks.

I was wondering if there's other applications, some metrology or inspection applications or any other tools that might go around the tool that you sell to these EUV like mask manufacturers.

Bill Miller -- Chief Executive Officer

I would say that, David, the real opportunity for us, I believe, is we have a very unique core technology ion beam deposition that originally started in the data storage space for decades. Then we found applicability for that in the EUV mask blank space because it could deposit very low defect films. Now we're seeing opportunities in front-end semi for ion beam deposition systems for very low resistance metallization films. And those are the -- that's the next frontier where we are working on, taking our ion beam technology into the semi space.

And we will be shipping in evaluation systems there in the coming quarters. I would say the other steps around EUV mask blank production, things like inspection are really not core technologies of the company today. And so we're very much focused on what we do really well and then exploiting that.

Dave Duley -- Steelhead Securities -- Analyst

OK. And then to follow on Gus' question about the hard disk drive space. You mentioned that you thought that 2023 would be a growth year for the disk drive business, and you're seeing a lot more order discussions now. When do you think the rubber hits the road, so to speak, and those customers would start to actually place orders or customer deposits? Or when is the next -- whatever the next step is to come, when will that happen? And I guess what will it be?

Bill Miller -- Chief Executive Officer

It would be order placements, deposits, et cetera. I would expect that to come back a bit this quarter as well as into the -- over the next one to two quarters, we'll have good visibility into next year.

Dave Duley -- Steelhead Securities -- Analyst

OK. And then could you just help us understand when you talk about component shortages. For you guys, what exact chips are short that are difficult for you guys to get right now?

Bill Miller -- Chief Executive Officer

A lot of it is actually a legacy older technology, where we've been buying this chip forever and then our supplier just doesn't want to make them anymore and things like that, for example, so then we have to buy them. So that's an area that's probably from a component standpoint that's very challenging. I think if you look at raw materials, we use a lot of stainless steel. The price of nickel has increased, and the nickel is a key component in stainless steel.

So that's a pricing impact. But yes, I'd say, overall, that's some color. I don't know, John, if you have anything else to add.

John Kiernan -- Chief Financial Officer

No, I think that's right, Bill. And the complexity of the tools and how many individual parts or components go into a tool, anyone, right, could stop a completion of a system. So I mentioned earlier, Dave, if you don't have the O-rings, right, you could stop a system shipment just for specialty type O-rings or valves or mass flow controllers, right. Certain type of components that are typically used in the type of equipment that we sell throughout the industry, right, those are the ones that everybody is sort of fighting their allocations, fighting to get their allocations and supply too.

Bill Miller -- Chief Executive Officer

I will say, David, our supply chain group is doing a phenomenal job in reacting to challenges as they develop. So I think we're doing pretty OK.

Dave Duley -- Steelhead Securities -- Analyst

OK. Last question for me is real quick. What is your current lead times for your tools? And the second question is in the LSA business that you have, it seems like you're doing really -- it's kind of bifurcated between the high end and then the non-leading edge foundry and logic business. I was just curious how the non-leading edge foundry and logic business is doing in the LSA area? And if you've seen any slowdown from any of the Asian guys? Or is there any change in demand from China and other customers?

Bill Miller -- Chief Executive Officer

We aren't seeing changes in demand. We're seeing trailing edge activity continue. I would say it's probably a third of the laser annealing business is trailing edge, I'd say. And then regarding our lead times, it kind of varies a bit by product line.

But I would say now, we're probably operating kind of in the nine-month plus kind of lead times.

Dave Duley -- Steelhead Securities -- Analyst

Thank you.

Bill Miller -- Chief Executive Officer

Thanks, David.

Operator

And with no other questions in queue, I'd now like to turn the call back over to management for any additional or closing comments.

Bill Miller -- Chief Executive Officer

Thank you, operator. I also want to thank our customers and shareholders, along with the Veeco United team for their continued support, as we execute on your behalf. Have a great evening.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Anthony Bencivenga -- Head of Investor Relations

Bill Miller -- Chief Executive Officer

John Kiernan -- Chief Financial Officer

Patrick Ho -- Stifel Financial Corp. -- Analyst

Miguel De Jesus -- Goldman Sachs -- Analyst

Rick Schafer -- Oppenheimer and Company -- Analyst

Adam Bistritzky -- Barclays -- Analyst

Gus Richard -- Northland Securities -- Analyst

Mark Miller -- The Benchmark Company -- Analyst

Dave Duley -- Steelhead Securities -- Analyst

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