Executives
Fletcher Chamberlin – Treasurer and IR Director
Ray Link – EVP and CFO
Don Kania – President and CEO
Analysts
Satya Kumar – Credit Suisse
David Wu – Global Crown Research Limited
JoAnne Feeney – FTN Equity Capital
Steve O’Rourke – Deutsche Bank
Matt Petkun – D.A. Davidson & Company
David Duley [ph] – Steelhead Securities [ph]
Jude Wright [ph] – GC Research [ph]
Patrick Ho – Stifel Nicolaus
FEI Company (FEIC) Q1 2009 Earnings Call Transcript May 5, 2009 5:00 PM ET
Operator
Good day, ladies and gentlemen, thank you for standing by. Welcome to the FEI first quarter earnings conference call. Here in today's presentation, all parties will be in a listen-only mode. Following the conference, it will be opened for questions. (Operator instructions) This conference is being recorded today, the 5th of May 2009. I would now like to turn the conference over to Fletcher Chamberlin. Please go ahead, sir.
Fletcher Chamberlin
Thank you, Luke. Good afternoon, ladies and gentlemen. As Luke said, I'm Fletcher Chamberlin, FEI’s Treasurer and Communications Director. With me today at our headquarters in Oregon are Don Kania, our President and CEO; and Ray Link, EVP and Key Financial Officer.
Before we begin our presentation, we have the regular housekeeping matters to address. This call contains forward-looking statements, to the extent that we discuss expectations about future corporate performance and guidance customer orders or revenue growth, performance by-product and markets, margin improvement, market developments and opportunities, the competitive landscape, products and technological development, product production and shipment schedule, the effects of future movements and exchange rate, cost savings and restructuring, changes in our effective tax rate or other future events or plans. Those statements are considered forward-looking, subject to risks and uncertainties that could cause our actual results to differ from the forward-looking statements made.
These risk factors are cited in more detail in today’s press release and FEI’s most recent 10-K, 10-Q, and 8-K documents and other filings with the SEC. Investors are urged to read those documents. Copies are available free of charge on the SEC’s Web site at www.sec.gov or on our Web site or from FEI’s Investor Relations department at 503-726-7710.
The company assumes no duty to update forward-looking statements set out in these documents or made on this call. This call is the property of FEI Company. It will be archived in the Investor Relations section of our corporate Web site at www.fei.com.
I’ll now turn the call over to Ray for the review of the financials and then, Don will comment on our markets in the business environment.
Ray Link
Thanks, Fletcher and good afternoon, everyone. Welcome to our first quarter call. I'll go through the financial reporting guidance and details and turn the call over to Don. We had a solid quarter. Bookings and earnings were above guidance and revenue was at the high end of guidance. Reverence bookings declined from the fourth quarter in a normal seasonal pattern with over 75 % of the revenue declined from last year's first quarter caused by the stronger dollar.
Given the severe decline in the global economy, our top line held up very well. In addition, gross margins improved compared to the fourth quarter and last year's first quarter despite lower total revenue and a reduced portion of our revenue from the high margin electronics segment. Operating income, excluding restructuring was above last year's first quarter in spite of the lower revenue and was the second highest in the last six quarters. This was our twelfth consecutive quarter of positive GAAP earnings, a record that few of our peers can match in this environment. We also increased cash and improved our liquidity in the quarter.
Turning out to the details, networking through the first quarter were $130.6 million, compared with $153.8 million in the fourth quarter and a $150.5 million in the last year's first quarter. Gross new bookings in the quarter were $139.1 million and were reduced by $8.5 million to re-value the backlog for currency movement. The year finished the quarter in $1.34 compared with $1.39 at the end of the fourth quarter. With the re-valuation, the backlog at the end of the quarter was $319.3 million, folding in about six months revenue with over 90% scheduled for delivery within a year.
Net sales of $141.8 million were down 7% in the fourth quarter and 6% from last year's first quarter. Research and industry revenue are $58.3 million, made up 41% of the total was down 30% in the very strong fourth quarter and was down 5% from last year's first quarter. Life sciences revenue of $20.9 million made up 15% of the total and was up 14% in the fourth and more than double last year's first quarter. As we have said before, life science bookings and revenue will fluctuate from quarter to quarter but we expect continued long term growth from this segment.
Electronics revenue was down 9% from the fourth quarter and down 37% from last year's strong first quarter. In total, electronics was 21% of revenue in the current quarter compared with 25% for all of 2008 and 34% in 2007. We have revised the geographic breakdown of our revenue as our indirect channel business has grown significantly in recent years. For those of you whose models include geographic sales, we have included an additional supplementary table with our earnings relief with the revised revenue allocations for the last eight quarters.
Revenue from US and Canada was approximately flat sequentially and compared with last year. European revenue was down from the fourth quarter, but up from last year's first quarter. Revenue from Asia and the rest of the world was down, but sequentially ahead from last year's first quarter, largely reflecting the decline in electronics revenue.
Gross profit margins for the latest quarter was 41.4% compared with 39.5% in the fourth quarter. This is our highest gross margin since the third quarter of 2007. A variety of factors contributed in the improvement, including a more favorable currency environment, product mix, better service margins, and reduced vendor parts prices.
All of our market divisions and service recorded higher gross margins, compared with the fourth quarter. We are especially pleased with the overall improvement because the quarter included lower overall revenue, a smaller contribution in high margin electronics business, and a higher percentage of revenue from service. Each of those would normally decrease gross margins, but the total increase despite those factors. For the second quarter, we expect gross margins to be above 40%.
Moving down the income statement are some of R&D and SGNA expenses worth $49.6 million, up 3% from Q4 and down 2% from last year’s first quarter. These totals are the result of tight control over discretionary spending, benefits from our restructuring steps, and a favorable currency environment. The latest quarter includes a net provision for bad debts of approximately $600,000 as a result of two semiconductor company bankruptcies.
We are now including amortization of purchased technology in SGNA expense, as there is only $325,000 in the first quarter and would drop to under $215,000 per quarter for the balance of 2009, and this time no longer warrants its own line items.
Operating expenses are expected to be slightly lower in the second quarter compared with the first. Restructuring expenses were $962,000 a quarter, compared with $820,000 in the fourth quarter. We expect this line item to be approximately, $800,000 in the second quarter and to gradually decline throughout the year.
Operating income was $8.1 million, compared to $11.2 million in the fourth quarter and $8.8 million in the last year’s first quarter. Excluding restructuring expense, operating income was above last year’s first quarter level on $10 million lower revenue. This is a good indication of offering effectiveness, as well as an improved currency environment, despite the global economic slow down.
Below the operating income line, total other expense was $320,000, compared to $1 million in the fourth quarter and $1.2 million a year ago. There were a number of components in this year’s – in this quarter’s non-op total, including currency hedging losses, substantially lower interest income due to a very low market interest rate environment, cost associated with net amending our credit agreement, these related to our the decision to cancel the embargo acquisition and a gain on a redemption of $15 million of convertible bonds.
These interest rates continuing at record low levels, ongoing exchange rate volatility, and one more quarter of currency hedging losses, we currently expect a total other expense line to show a loss of between $1.5 million and $2 million in the second quarter. This loss is expected to be substantially lower than the last two quarters of the year.
As noted in the press release, the income statement from the first quarter of 2008 has been recapped in accordance with the required adoption of ATV14-1, related to convertible debt interest and issues that may be settled in cash for shares. Restatement reduced recorded net income and diluted earnings per share for last year’s first quarter by $3.1 million and $0.06 per share.
This statement is related to the company’s zero percent convertible notes that were paid off in June 2008. As a result, there will also be a restatement only for the second quarter of ‘08 and no other 2008 restatement, as the debt was paid off. Our remaining convertible note does not contain a cash on (inaudible) feature, and it’s not subject to the new requirement. The tax rate was 18.8% for the quarter. We expect the rate to be approximately 25% to 28% in the second quarter.
All of these leads to GAAP net income to $6.3 million or $0.17 per share for the first quarter, well above our guidance range, down 14% from the fourth quarter, and up 26% from last year’s restated results.
The fully diluted share cap was $37.6 million in the quarter. We expect the share count will grow only modestly in the next few quarters. The total does not include $3.4 million shares attributable to our 2.78 convertible notes because their inclusion would be dilutive at current income levels. Our balance sheet remains very strong, a real benefit in the current economic environment, and we increased our liquidity in the quarter. Total cash in investment in the quarter, including a restricted cash and long term investment was $372.9 million, up 53.6 million from the end of Q4.
Operating cash flow is positive $1.2 million for the quarter and our EBITDA was positive $16.1 million. Receivable days outstanding were the lowest first quarter level in three years and inventories were essentially flat.
During the quarter, we improved our liquidity position as provided in the settlement with UPS, that they reached with regulators. We borrowed $70.8 million from UPS against our $110 million base amount of auxiliary security at net zero interest. As we mentioned last quarter, UPS has also agreed to repurchase all of our auxiliary security at par on June 30, 2010 and will use those proceeds to pay off that loan.
We also retained $15 million of our 2.78% notes in the first quarter, bringing the total outstanding under that issue to $100 million. Capital spending in the first quarter was $3 million compared to depreciation expense of $4 million.
Now, let’s turn to the details of our guidance, which will continue to provide in fairly tight ranges despite the uncertain economic situation. All of our guidance for Q2 assumes a Euro rate of $1.35. We expect revenue for Q2 to be in the range of $136 million to $142 million. Bookings are expected to be above record $135 million. GAAP earnings per share from the second quarter are expected to be in a range of $0.10 to $0.14. Restructuring charges are approximately of $800,000 and substantially higher non-operating expense are included in the GAAP guidance for Q2. We believe that providing GAAP results and guidance, along with some key component is a good way to measure our current performance.
So in summary, we had a solid quarter with improved margins. The outlook for the next few quarters is – for similar operating results with a one quarter increase in non-operating expense in the second quarter and the potential for normal seasonal patterns in revenue in the third and fourth quarters. With that, I’ll now turn the call over to Don for additional comments.
Don Kania
Thank you, Ray, and good afternoon, everyone. We had a solid quarter despite weakness in the global economy, highlighted by a decline in the semiconductor capital equipment market. Those bookings were seasonal and above our forecast. Our team significantly improved our service and product gross margins. Our pipeline of potential orders continues to grow, even after the record second half 2008 booking, with strings in our research and life sciences businesses.
As a reminder, the gross in these businesses have offset the decline in our electronics business. We remain cautiously optimistic at FEI’s prospects for the remainder of the year due to potential second half improvement in bookings as a result of the global economic stimulus program, particularly in the United States, a more terrible currency environment than we saw in 2008. The benefits of restructuring and internal investments and a continual flow of new products scheduled to be announced in the next few months, as we maintained our investment in R&D. Over all, our strategy and execution has served us well in a difficult period.
Turning now to the first quarter, we received our 100th Titan order, a significant milestone for our flagship product. We continue to see ongoing opportunities for the Titan around the globe, along with market specific variants such as the ETEM. The Titan for chemistry, the Krios, the Titan for life sciences, and soon to be released new analytical capability.
Research and industry remained our largest single segment, with bookings of $39.4 million. That total was down from the record level of the fourth quarter, but up from last year’s first quarter. This is the first of our investment in Asia, as we recorded strong orders from China and Japan.
A pipeline of potential orders continues to grow for research and industry. We’re seeing a substantial increase in quoting activity, as a result of the stimulus packages from around the globe. Life sciences continues its growth with bookings of $19.2 million, up 11% for the fourth quarter and up 16% from last year’s first quarter. Again, orders from Japan were a bright spot for this quarter. Looking forward for life sciences, we expect continued growth, building on the 32% compound annual growth we have seen since 2006.
We have the right product at the right time in the Krios and we expect stimulus spending would benefit us in this area as well. As we assess several times, from one quarter to the next, you may see significant variability and bookings, but we remain bullish on the life sciences at FEI.
Electronics bookings of $33.2 million were up 50% from the low levels of the fourth quarter but down 34% from last year’s first quarter. We had no order cancellations in the quarter. As expected, we are seeing technology buys by major players in the industry. We expect this market to remain choppy for the next few quarters.
We have the right solutions for the lab, including Magellan, Helios, Titan and others that we’ll roll out later this year. We expect our strategy will place us in a strong position as the industry comes off the bottom.
In servicing component segment, a number of annual contracts are renewed in the first quarter each year. Bookings showed a normal seasonal strength this year by growing 21% from the fourth quarter to $38.8 million. However, it went down from the last year’s fourth quarter total, in part because last year included an unusually large multi-year contract with a major customer. In addition, this year, several semiconductor companies chose to move to time and materials, away from annual contracts. We do expect a normal seasonal decline in service bookings from Q1 to Q2. It’s important to note that we did see an improvement in equipment utilization and contract as we exited the quarter.
Looking at the second half, we see potentially positive impact on our bookings from government stimulus packages, recognizing that revenue growth will lag the orders by one or two quarters. In the United States, approximately $15 billion has been allocated to science and technology agencies that could benefit FEI, including NIH, NSF, NIST, DOE, and others. These agencies are moving to implement their mandates and are developing their procedures and processes. There appears to be tension between documenting the evidence of job creation and the pressure to spend the money rapidly to stimulate jobs. The end result is an uncertainty in the time of worst. As I said earlier, we are seeing a significant increase in quota activity, and expect a positive impact in our orders in the second half of the year.
The research community is seeing this as an opportunity to add the biggest and best tools to their infrastructure and to spend money quickly. Our strategy of technology leadership and our US base should be rewarded, as the stimulus money is spent.
In addition to the US stimulus package, we see this pattern repeated in other countries, including China, Japan, and several European countries. We believe that the fundamental rationale for global investment and Nano technology, the development of industries, creating jobs, and educating the workforce remains unchanged, if not enhanced by stimulus during this difficult economic times.
In the United States, we are encouraged by President Obama’s speech last week to the National Academy of Scientists, where he pledged to significantly increase the percentage of US GDP to devoted to scientific research, development, and education. We see the strong commitment from the new administration as a positive for FEI, whether or not the specific percentage target is ultimately fulfilled. We are tearing the calm of cautious optimists. We believe that FEI has the right strategy and executing to prosper long term.
We have the technology leadership and continue to invest, with additional products on the way. We will continue to add value with an increased solution focus for all of our markets. Stimulus packages will benefit our growing research business. Stimulus packages will also benefit our fast growing life sciences business. Electronics business, now at a low point as percentage of revenue will recover and we are well positioned to grow when it does.
The operating, supply chain, and manufacturing improvements from our restructuring program will lower our cost and create a more natural currency hedge. We have a strong balance sheet and liquidity with significantly more cash than debt and will continue to generate positive cash flow.
In closing, I also want to remind you that we’re planning a third annual New York investor meeting at the NASDAQ market site on June 2nd. You’re all welcome to come and hear more about FEI and meet more the management team. If you have not already done so, please let Fletcher know about you would like to join us. Finally, I would like to thank FEI’s employees for their extraordinary efforts during these challenging times. With that, operator, we’re now ready for questions.
Question-and-Answer Session
Operator
Thank you, sir. We will now begin the question and answer session. (Operator instructions) Our first question comes from the line of Satya Kumar from Credit Suisse. Please, go ahead.
Satya Kumar – Credit Suisse
Yes. Hi, guys. Thanks. I was wondering if you can give me some color on the mix for bookings as you see it, but with electronic sea search and bio in the second quarter. It seems like it’s guiding up 3% for bookings versus, I think the last several years have been down about 9% or so? I just wanted to get some color on what’s driving that.
Ray Link
Yes, I think that what we would point to is, as we highlighted is strengthen the research and the life sciences area. It’s hard to call of what the electronic business is going to do in detail. I think that’s still a pretty sensitive environment, so I would say, taking a step back it’s expected those areas that have been strong to remain strong. And we had a good, in this environment electronics business contribute not necessarily any Q1 – not necessarily a predictor of well happening in Q2.
Satya Kumar – Credit Suisse
In terms of the significant increase you were saying in the quota activity, I was wondering if it’s possible for you to possibly take a stab at quantifying that. Are we looking at an order pipeline that perhaps (inaudible) the peak orders you had last year? How shall we think about that?
Ray Link
I would think that at the base level, we are expecting to see the second half orders to certainly exceed the first half of this year. And if we would roughly wrap a number around that, at least 10% of the increase is a minimum of what we’re targeting at this point. The timing makes it difficult to make the call at this point, to be more specific. But we are really excited about the pipeline growth that we’re seeing and it’s now all about timing when the orders come because we believe we’re absolutely favourably positioned to garner a good percentage of that opportunity.
Satya Kumar – Credit Suisse
All right. And lastly, I think early on you’ve mentioned that second half you expect to see seasonal – normal seasonal performance? I was wondering if you could add some color on whether you’re referring to booking there or booking the revenues.
Ray Link
We’re primarily referring to the revenues side and typically, Q3 is soft for us both from the customers’ side, little bit lower than Q2, and also from the fact that we have large operations in Europe, slows the operation down and that’s just traditional seasonal. And four is always a very, very strong quarter for us, overall. So our view today is that we should expect to see similar kinds of behaviour in the latter three quarters of this year.
Satya Kumar – Credit Suisse
I think I’d squeeze in the last question, you know, obviously you’re seeing strength from the government spending portion of offerings. Is there an offset that you might be seeing with perhaps with government spending going down at Universities that might take away some of that strengths? How do you look at the consolidated pipeline?
Ray Link
Yes. I think when we look at the –- and really for us the more important things to focus on is the consolidated pipeline, and that’s been growing. Now, I know there’s a lot of concern about the endowment size and the state budget. So that would be the two things.
And it’s really mostly a US phenomenon in the University environment. And we’ve seen some effects but predominantly it affects timing, not whether people spend the money and typically those moneys aren’t use to acquire the equipment. They’re used to either provide some supplements to the purchase with some other government agency funding it or prepare the facility.
And so what we’re seeing are some delays in that activity as opposed to people saying, “Gee, I’m not going to buy the equipment.” So it makes a more sensitive environment from the purchase side but I don’t think we’ve seen any substantive decline in the pipelines as a result of that. So we’re hopeful that the stimulus packages are an additive activity for us.
Satya Kumar – Credit Suisse
Thank you very much.
Operator
Thank you. Our next question comes from the line of David Wu with Global Crown Research Limited. Please, go ahead.
David Wu – Global Crown Research Limited
Yes, well, I was just trying to get an idea about the gross margin levels. I believe the long-term goal is a high number than what you achieved in Q1. And I was wondering whether the events of Q1 is a one-time only event that have a permeable mix of currency and product mix, or how far are we on this track of building up a meaningfully higher gross margin trends down the road?
Ray Link
David, this is Ray. I think when we look at Q1, we’re pretty happy with what happened in Q1. First of all, our margins would have from 39, and changed to a 41.4 in one quarter, a substantially lower revenue. And when we look at the revenue obviously, our revenue in our electronic segments has been a lower and will be challenged probably for a couple of more quarters. But I think when we look longer term that our goals are still intact. You have an interim target of 43% and a target in the 18 to 24 months of 25%; we are still on track for that.
As we’ve always said, it does require a more revenue, because revenue is the biggest driver, we need volume. And to get to the 45% or so of ranges, we need to be somewhere around about $160 million with more of our normal mix of business, so slightly higher electronics portion of that.
David Wu – Global Crown Research Limited
I was so impressed about your gross margin Q1 considering that the electronics business was sequentially down.
Ray Link
Right. Yes, we were very pleased with that. We had a very good overall mix of business that the good portion of higher end systems that are not electronics portion of our business. So we had an overall good mix–
David Wu – Global Crown Research Limited
Is the gross margin could have been the sustainable one over that the first quarter and that unusual?
Ray Link
Yes. I think we had some of that experience, in terms of pricing of the products that were positive but there were –- the currency and the structural improvements are, we think, sustainable. We didn’t highlight and we won’t give specifics but as part of gross margins improvement, there was a material cost reduction that were substantive within that. And that’s I think forever for us so I think we continue to positive with our improving gross margins. We have given our guidance for Q2 [ph], which is above 40. And we did have some good things on the mix side, but that was on down revenues. So we’re pretty good about the accomplishments.
David Wu – Global Crown Research Limited
Down electronics, too.
Ray Link
Oh, yes, and lack of electronics, so.
Don Kania
And last but not least, we need to have currencies cooperate. Clearly, if it stays below 135, it’s beneficial to us. If the currency goes above that, it’s tough to maintain the margin.
David Wu – Global Crown Research Limited
Okay, I was wondering, while we’re on the subject of currency, when do you think, at least in broad terms which would achieve a natural hedge? I think that you’ve been on that program for a while.
Ray Link
We’ve made progress on that and the things we’re doing there have the most impact and that in supply chain-related, we’re trying to move some of our supply chain from Western European manufacturers too. In some cases, the same companies would move into their subsidiary that may be in Asia until we get a better match of currencies.
We have moved a few products around to get a little bit better balance within our factories as well. We never said we would get into a complete zero natural hedge, but we wanted to reduce our net shore exposure and we did an excellent progress on that last quarter.
David Wu – Global Crown Research Limited
Okay, well, very good, thank you.
Operator
Thank you. Our next question comes from the line of JoAnne Feeney with FTN Equity Capital, please go ahead.
JoAnne Feeney – FTN Equity Capital
Yeah, thanks, nice quarter, guys. My next question is about the tax rate, why is it going up so much this quarter, Ray?
Ray Link
I think the question is, why was it down so much in Q4? Our model for tax rate is somewhere in the 25% to 28% range. And in Q1, we had two things that helped us. We had, actually, slightly higher US based income, and with our tax loss carry forth situation to use valuation allowances that actually reduces our tax rate in the short term.
And we also we’re able to close out an outstanding tax issue in one of our European subsidiaries. So that drove our tax rates down a bit. So I think getting back to the 25% to 28% is really where we think we would be in the near term.
JoAnne Feeney – FTN Equity Capital
Okay. And then on the top line projection for next quarter, given your backlogs, can you shed some light on what mix might do next quarter, whether that would tend to help your margins or is it sort of neutral from quarter to quarter?
Ray Link
I would say a huge change in mix in terms of end market. I think what we reported for Q1 is going to be plus or minus, by end market, about the same.
JoAnne Feeney – FTN Equity Capital
Okay. Given what you saw this quarter in orders out of the electronic side, I know it’s still low levels here, but are you seeing any early traction with Magellan? And is there still room out there? Is there still interest in Titan upgrades out of the 75? Can you tell at this point?
Ray Link
Magellan does not – Magellan first. Yes, we continue to get the one-offs [ph] into the costumers of Magellan. I think the disappointment with the slowdown is it’s preventing copies from acquiring multiple tools in individual locations. But that will come. The key is – in this environment, is to get the tool of record wins. And we’ve been doing a very good job with that.
And then on the Titan – or the Titan upgrades, I think that’s going to be – continued to be driven by the ever shrinking feature sizes, and the need – as we’re sensing more and more – the need for better analytic setback scale too. So it’s not just the ability to see the smaller things. It’s also to discriminate what materials are there. And if you caught in the comments, it’s also going to lead us to a new product we’ll be rolling out soon. It's going to be high triple analytic tool, which will also help in that segment as well.
So we’re sure that we’ve got things covered. The trend’s still going our direction. It’s just the leading guys are the only ones spending and they’re buying technology, the one-offs.
JoAnne Feeney – FTN Equity Capital
So the one-offs in Magellan you mentioned – it sounded like you said, you’re getting some tool of record wins. So shall we interpret the one-off as locking you in when these guys do start spending on capacity expansion?
Ray Link
As locked as you can be into a company, yes that true.
JoAnne Feeney – FTN Equity Capital
Should we assume that that's the largest players out there that are taking these one-offs now and are setting themselves up next year then?
Ray Link
Well, typically we spent money during this period.
JoAnne Feeney – FTN Equity Capital
Okay. And I do have one final question. Can you give us perhaps an update on some of the larger Nano Tech centers that have been sort of on their way around the world? Have you seen any change in their enthusiasm given the economy? Or are things still looking – are they still looking to these for economic growth diversity?
Ray Link
I think that the pieces remain unchanged. You’ll see some original variations. But as you know the biggest deal we’ve done recently was the Saudi Arabia, and we’re shipping that product right now. And in fact, they’ve ordered several more pieces between the time the major order was placed and today. So the number of units going there has increased. So their appetite continues to grow, in fact.
I think that trend continues. I think we feel comfortable with around the globe – that investment. Now, there are some exceptions. I think, Russia being one, where their bank accounts have been significantly drained. I think their enthusiasm remains, but their wallets are up to the task right now. But on the average, I think life is good.
JoAnne Feeney – FTN Equity Capital
Okay. Thanks so much.
Operator
Thank you. Our next question comes from the line of Steve O’Rourke with Deutsche Bank. Please go ahead.
Steve O’Rourke – Deutsche Bank
Thank you. Good afternoon. Just to go back to some of the increased quota activity that you’re seeing, at least some stimulus spending, how do you gauge the release of capital from stimulus spending, how it might impact 2009? Do you have some indication that gives you confidence that this could start to flow by midyear?
Ray Link
That’s why we try to highlight the uncertainty, I think. And we talked only generally about the better half because we don’t have a good sense of the timing. And we don’t think our costumers have a good sense of the timing. So therefore, that contributes to the uncertainty. But if you look at the mandates to those problematic people, they are supposed to get this money into motion, into the hands of companies so that jobs can be either preserved or generated.
Steve O’Rourke – Deutsche Bank
Are you getting indications from those that are supposed to be controlling these funds, that things could start to flow by Q3. Or is this more through your costumer base?
Ray Link
It’s on both types. We talk to both. We’ve actually just – by way of focusing in this area, we’ve assigned one of our executives full time to focus on the US stimulus efforts. So I think our chain of information is absolutely solid. And it’s also quite worthy of highlighting that many times when we talk to our costumers that they’re finding that either with proposals that were in abeyance or that they were trying to move too quickly, they’re finding positive reception from the agency’s still – from the agency's perspective. That’s a way to place a low risk bet on someone who’s doing well, and get the money into their hands. So there are ways to improve the velocity. They’re looking to existing opportunities. So it’s pretty cool from that perspective.
Steve O’Rourke – Deutsche Bank
Fair enough, and one last question. How much of backlog are Titan tools? And what’s the lead time for a Titan tool now?
Ray Link
We don’t quote – we won’t tell you that percentage of the backlog number. And it depends on the configuration of the tool. But on average, about six months.
Steve O’Rourke – Deutsche Bank
Okay. Thank you.
Operator
Thank you. Our next question comes from the line of Matt Petkun with D.A. Davidson & Company Please go ahead.
Matt Petkun – D.A. Davidson & Company
Hi, good afternoon. Strong margins in the quarter, and both Ray and Don, you’re showing the fact that the mix in the non-electronics business has been improving, obviously given some of your recent product offerings. Would you say that’s consistent with the bookings that you’re seeing in the pipeline that we’re also seeing a follow through as with higher mix products and the opportunities out there?
Ray Link
I would say on both sides that we’re seeing a bias towards the higher end products which carry a better margin overall. So I think if we looked at Q4, Q1 bookings and the margin contents of those, we feel pretty good about the content there.
Matt Petkun – D.A. Davidson & Company
Okay. And then, Don, you also mentioned that there’s potentially some opportunity for you guys to bring out some new analytical capabilities. Would that be launched in a new platform or are you talking about potentially even add-on opportunities for some of your drifting tools in the field?
Don Kania
Matt, I think we’re just getting into the competitive area a little bit. So I think you’re just going to have to stay tuned for a couple of the key tradeshows later on in the year.
Matt Petkun – D.A. Davidson & Company
Okay. Either way, better margin though, right?
Don Kania
Yes. Good margins and I think adjusting a market need on the electronic side and providing a differentiated capability through our research costumers.
Matt Petkun – D.A. Davidson & Company
Okay. And then, Ray, I think another caller was asking about this more directly, that the service margin expectation for the next couple of quarters, just given the fact that some of your costumers are maybe pulling back a little bit on service contracts, would those margins trend down a little bit the next couple of quarters? Or can you stay above 30%?
Ray Link
We think they’re going to keep in the same general range that we reported on. We brought in a new service executive about six months ago or so, and he has really got the team working on this. And while you’re right that there’s going to be a little bit of movement, time and material, we feel that some of the things that we’re doing from a management’s standpoint will be able to hopefully hold margins, or longer term improve margins, and in the near term at least hold on.
Matt Petkun – D.A. Davidson & Company
Okay. And then, on the sales top, Ray, roughly excluding the bad debt, it looks like it was roughly flat year-over-year despite a lower Euro. How should we be thinking about that line item going forward throughout the year? At this levels, are you happy with the absolute dollar figure?
Ray Link
I think it could come down a little bit. We had a mix of more agent-distributor type sales in Q1. And we also have a situation where we have accelerators and we match our commission expense with one tool or ship. So people who exceeded their bookings, those tools got shipped in Q1. And as a result, we had slated a higher expense. So we’re looking at that and hopefully we'll have a little bit – actually, I hope it’s a lot larger, meaning we have a lot more revenue. But realistically and apples to apples, we think that that item could come down a little bit in Q2.
Matt Petkun – D.A. Davidson & Company
Okay. That’s all for me. Thanks so much, guys.
Operator
Okay. Thank you. Our next question comes from the line of David Duley [ph] with Steelhead Securities [ph]. Please go ahead.
David Duley – Steelhead Securities
Yes. Nice quarter. You guys gave us some information about how currency impacted the backlog. Could you talk about how it impacted the revenue and the gross margin in the quarter?
Ray Link
We talked about it on the revenue, where compared to a year ago, is down – about 75% of decline, which is currency related. I think a better way to think about currency is, one is backlog, and two is what’s the overall impact on margins. And when we look at our margins, quarter-over-quarter and year-over-year, we obviously had – we have lower revenue, but we had better mix in Q1 versus both sequential and a year ago, and currency in and of themselves had an impact of somewhere around 1.5% point change. So a chunk of the net change was attributable to currencies. We had some benefit from operating improvements and lower prices, and also from benefits from service.
David Duley – Steelhead Securities
Okay. So if I heard you right, 1.5% point of gross margin improvement sequentially came from currency, and the balance came from those other factors that you talked about?
Ray Link
That’s roughly accurate.
David Duley – Steelhead Securities
Okay. Inside the order number, I thought – I was surprised by two things, that the electronics bookings number was so strong and that the research and institute business overall order numbers – they usually decline fairly substantially in Q1. But they seemed like they were down a little bit more this Q1 than the last couple of Q1s. Was there anything on one of those line items that was special?
Don Kania
Let’s start with the latter part first. R&I just came off with just a killer Q4 in that what we saw there, I think, is some pulling from one to four sort of that effect. So as we look forward, pipeline is strong, forecast is strong. So I don’t think there’s anything systematic going on here.
On the electronic side, I think we’re just dealing with the vagaries of when a small number of costumers decide to buy a few things. And so we had a good quarter this quarter, last quarter, and semiconductor was weaker. And as we guided, I think we’ll just be bouncing around a little bit in this segment until the industry as a whole wakes up.
David Duley – Steelhead Securities
Okay. And I guess two other quick ones for me. What roughly is the involved base of Titans now?
Don Kania
Boy, that certainly is a backward way to ask how much is in backlog? We're not going to give you that answer.
David Duley – Steelhead Securities
Okay. Yes that was (inaudible), trying.
Don Kania
I know, I know. That's your job.
David Duley – Steelhead Securities
Can you share with us maybe another statistical – defined on – (inaudible) trying to protect it? But you talked about Magellan on – and you mentioned this term tool of record. How many customers are you tool of record at? And have those customers placed orders that are in the current backlog?
Ray Link
We won’t report on how many we have this tool of record. There have been a couple of instances, let’s call it second tool or more orders from some of these customers, at that are in the backlog, but if you remember our expectations when the industry was in much better shape that we would receive more, significantly more that that from individual customers. Don.
Don Kania
We’re doing as well as you can in an environment like this, but it was below our expectations, but when – we believe when stronger times return, being established in tool of records will lead to strong growth in that segment.
Ray Link
I’d like to conduct a tool of records, but I’m sure you saw the relief that we had our hundredth Titan order today and while one of those are in research, but it kind of sets up that shop as an FEI shop.
David Duley – Soleil Securities
Great. Thank you.
Operator
Thank you. Our next question comes from the line of Jude Wright [ph] with GC Research [ph]. Please, go ahead
Jude Wright – GC Research
Great, good afternoon guys. Thank you for taking my questioning, congrats on continued progress in building a tremendous backlog despite the macro climate. Don, my first question is a product portfolio question. In addition to the kind of traditional revolutionary product developments automation, easy use, I was hoping you can update us on the more evolutionary product strategies, specifically as resolutions of sense in times approach some physical limits in the near term, what do you see the biggest growth driver for you guys? Is it an entirely new platform category, either (inaudible) microscope or something like that? Or do you see your business model over the next couple cycle focusing more on analytical and integrated metrology aspects?
Don Kania
Yes, okay. So, this is really I think there’s a lot of trends going forward and we still believe there’s some headroom in TEM for resolution and I think it was in the fourth quarter. If you remember the team program, this half (inaudible) better tools out there. We believe there’s a market place for those, but I think that starts to represent then the point of diminishing returns on resolution on TEM and we think going forward, there’s a couple of things you need to do, analytic being one very, very important area. So you know where the Adams are, now you want to know which one is which, and we believe we have some highly differentiating technologies in that area over time in the TEM space.
And then you’re right there’s the – let’s call it the productivity solution which we’ve been providing for the electronics world. We’ll need to carry that a step further for the life sciences growth, in terms of tremendous season of years from sample prep to data out code [ph], group to data is my favorite phrase for that so major trend shift from resolution to analytics. Make the tools transparent to users particularly in new market segments like life sciences.
If you move to the same world in things like that and you mentioned the Helium Ion microscope, I’ll remind you that the technology that we sold and (inaudible) picked up from us because we believed it was a test in each product. There’s always a market for new imaging modes and Helium Ion represent that, but we felt that the utility and the difficulty in the expense of the technology would limit its growth and I would claim that’s in fact indicates today with that technology.
We believe our – what we call you-see [ph] technology in our stands represents state of the art imaging, some scalability there too and be in the same range of not competing directly with what you could be radically achieved with Helium Ion as well as provide all the analytical capability existing into structure, the existing familiarity to customers with that technology.
So we think that’s the right route to go there. Just go along the trends and improve the technology in the area that’s been wildly successful overall.
Don Kania
So that has both the analytic component, but there’s still legs there for resolution. The Magellan is one step in that direction and we believe there’s other things we can do better as equally interesting.
Jude Wright – GC Research
My follow up to that is that I guess I look at your traditional product portfolio and think of it as microscopes with really good eyes. We learned kind of the business model for that is a 48% gross margin, 12% operating margin. As we look at that kind of evolution of your product portfolio to a smarter microscope, what do you think the right business model is for that type of product?
Don Kania
Yes, I think that wraps into our long term vision that in a margin – think about wrapping – one way to think about this rewrap for software into the product with minimal hardware additions, and so one should come in with extremely high margins for a software additions to a product that provides that more complete solution. And as we look – I can give a near term example, as we look at the mining business wherein the last quarter we purchased the assets of a company and we have a strong partner in the minerals area. If you team that minerals product up with the hardware product, which is this low level (inaudible) that normally garners very poor margins as – put the software on it and provide the solutions to the customer that has a real ROI for him those margins can go up substantially and we see that happening. And so that’s the mantra for the future, substantial margin improvement as you provide a better solution for the customer.
Jude Wright – GC Research
Fantastic. Last question, Ray, actually, if you could update us on – you haven’t cared about this for a while, but operating break even and the incremental margin assumptions we should be using above that level?
Ray Link
We’re probably in the 120-ish range.
Don Kania
Maybe 125, obviously depends on the mix, that’s what I would look forward and I think from incremental gross profit margin I think you kind of get beyond some level of break even words that’s becoming more meaningful, but I think if we start looking at as the company goes $120 million to $150 million that incremental gross profit margin is closer to 50%.
Jude Wright – GC Research
I'm sorry, 50?
Don Kania
Five-zero, yes.
Jude Wright – GC Research
Thank you.
Operator
Thank you. Our next question comes from the line of Patrick Ho with Stifel Nicolaus. Please go ahead.
Patrick Ho – Stifel Nicolaus
Thanks a lot. A couple of questions, first, on the gross margin performance and how strong it was. Are you realizing any benefits you have the shipped Ultra Clean than on the manufacturing side. Or was it from other facets that drive the gross margin offside?
Ray Link
I think, one, the Ultra Clean side, we’re very happy with what’s going on. But because the electronic segment is down, generally, we haven’t seen a lot of benefit from that yet. So the primary products that will go through there are semiconductor products. So all the right things are happening. We’re very happy with that. And our projection is more volume goes through there with that – we’ll share the benefit. But we really haven’t seen it yet.
Don Kania
Yes. It's mostly in sourcing of products.
Patrick Ho – Stifel Nicolaus
Okay, great. On the electronics side, in the past, you’ve discuss how areas with the semiconductor side of things, things like copper and low key, and that’s helped drive the need for your tools, at least from the R&D and the leading (inaudible). Are there any other new aspects that are driving with double patterning, something that’s now driving more demands for your tools beside the lowest link? What other changes in the semiconductor side are you seeing are drivers for your tools?
Ray Link
I think we’re – double patterning is valuable to us. But probably more important to us is where you see materials changing. So high (inaudible) metal, that whole area is – more and more, we're realizing with our customers that understanding how those – the atomic level understanding of those inner phase is absolutely critical to understand how devices perform. And we continue to see a greater and greater demand for TDM data to support development and manufacturing in that area. So we feel the season's is not violated other than there’s just less money being spent out there in that world.
Patrick Ho – Stifel Nicolaus
Final question, just on the broader industry picture. Given your competitive landscape where you have some major competitors who are quite large, have a lot capital resources as well as competing these others that are not as well capitalized, at least comparatively to you. How do you see the overall industry landscape playing out especially in this current market environment? Do you see consolidation taking place where it eventually could strengthen you just because you have fewer players out there?
Ray Link
I think that’s difficult to see consolidation given the different key players in the industry. If we look at the performance of our competitors, I think they’re performing much poorer then FEI. And some of that information is public and some of it's not. But it’s difficult to see how consolidation could be moved forward given the geographic diversity of the companies that participate in this marketplace.
Patrick Ho – Stifel Nicolaus
Great. Thanks a lot.
Don Kania
Thank you.
Operator
Thank you. Our next question is a follow-up question from the line of David Wu with Global Crown Research Limited. Please go ahead.
David Wu – Global Crown Research Limited
I just wondered, it's one that's playing in my head. And since you folks have talked about at least a 10% improvement for the second half versus first half in bookings, I assumed that research and life sizes will grow, all the rest of them would be flat. And that’s where the 10% came from? Am I correct?
Ray Link
I think that's a fair high level assessment. The stimulus that we referred to in that comment is almost exclusively driving research in the life time, so that’s where the upside comes close to – comes from.
David Wu – Global Crown Research Limited
And just a last question, and quickly. Have you submitted to the revised and sent a program to the Board for the second half, and has that been approved?
Ray Link
No, because that the Board meeting is coming up, and that process comes a little bit later.
David Wu – Global Crown Research Limited
Okay. Thank you.
Ray Link
You’re welcome.
Operator
Thank you. Our next question is a follow-up question from the line of Matt Petkun, D.A. Davidson & Company, please go ahead.
Matt Petkun – D.A. Davidson & Company
Hi, I didn’t hear this bit on the percentage of the electronics bookings that came from the data storage market. I believe last year about out of your 50 million, you did 20 million in data storage?
Don Kania
The number is considerably below that, it's less than $10 million. It was ballpark at 15% to 20% of the total. So it was decent. It wasn’t down to the really low levels that has sometimes happened in data storage, but it's also not a huge driver.
Matt Petkun – D.A. Davidson & Company
Okay. And then one other thing that's clearly driving a lot of fluctuation of the bookings is that fact that you guys, last year, enjoyed some huge deals. So I don't know if it's fair to make quarterly comparisons on those deals. But Don, could you share – is this going to consist more of singles and doubles and pure grand slams? Or are there few other big orders like that that have the potential fitting maybe in Q4?
Don Kania
The way I would characterize is we continue to have a pipeline of large opportunities. And the contributors, given the stimulus stuff, will probably be individuals. So I would look at it more as a stream that we we’ve been seeing, and with some base hits scattered on top.
Matt Petkun – D.A. Davidson & Company
Okay. Great. Thank you.
Operator
Thank you. (Operator instructions) And then actually, I'm showing that there are no further questions in the queue.
Fletcher Chamberlin
Thank you very much, we appreciate you're joining us. Obviously, let me know – this is Fletcher. Let me know if you’d like to join us on June 2nd, at the NASDAQ market site in New York. We’d love to have you there. Thanks very much.
Operator
Ladies and gentlemen, this concludes the FEI first quarter earnings conference call. If you'd like to listen to a replay of today’s conference, please dial 303-590-3000 or 800-405-2236, with a pass code of 11130592. ACT would like to thank you for your participation, you may now disconnect.
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