FEI Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.30.13 | About: FEI Company (FEIC)

FEI (NASDAQ:FEIC)

Q1 2013 Earnings Call

April 30, 2013 5:00 pm ET

Executives

Fletcher Chamberlin - Treasurer and Communications Director

Raymond A. Link - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Don R. Kania - Chief Executive Officer, President and Director

Analysts

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Chris Godby - Stephens Inc., Research Division

Joseph A. Maxa - Dougherty & Company LLC, Research Division

James Ricchiuti - Needham & Company, LLC, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

David Duley

Derik De Bruin - BofA Merrill Lynch, Research Division

Thomas Diffely - D.A. Davidson & Co., Research Division

Jairam Nathan - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the FEI First Quarter Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, April 30 of 2013. And I would now like to turn the conference over to Fletcher Chamberlin. Please go ahead, sir.

Fletcher Chamberlin

Thank you, operator. Good afternoon, ladies and gentlemen. As Brittany said, I'm Fletcher Chamberlin, FEI's Communications Director. With me today at our headquarters in Oregon are Don Kania, our President and CEO; and Ray Link, EVP and Chief Financial Officer. We appreciate your interest in FEI.

We've again posted some slides under the Events and Presentations section in the Investor Relations part of our website, fei.com. We will refer to these slides during today's call. We hope having the slides will make it easier for you to listen to our comments rather than just focusing on getting the numbers recorded.

While you're pulling up the slides and before we get to the presentations, we also have the regular housekeeping matters to address. This call contains forward-looking statement. To the extent that we discuss expectations about future orders, revenue, gross margins, operating and restructuring expenses nonoperating income, our tax rate and earnings, core growth expectations for particular segments of the business, expectations for growth due to new products or new applications for our products; potential penetration of new markets; planned product introductions; expected government spending for research tools worldwide, expected results from past or future acquisitions 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 statement made. These and other risk factors are cited in today's press release on Slide 2 of the slide posted with this call and in FEI's most recent filings with the SEC. Investors are urged to read these documents. Copies of the SEC filings are available free of charge on the Commission's website at sec.gov or on our website or from our Investor Relations department at (503) 726-7710. The company assumes no duty to update forward-looking statements set out in those 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 website at www.fei.com. I'll now turn the call over to Ray to go through the financials. Don will then discuss our business and the outlook, and then we will take questions.

Raymond A. Link

Thank you, Fletcher, and good afternoon. We had a good first quarter. Bookings, revenue, net income and cash flow from operations set all-time records for a first quarter and bookings were the highest for any quarter in our history. EPS was above last year's first quarter and at the top of our guidance ranges. Gross margins were 130 basis points above last year's first quarter. As planned, R&D spending increased as we continue to invest in new products and applications. We have now recorded 28 consecutive quarters of GAAP profits.

Net bookings for the quarter were $230.7 million, up slightly from Q4 and up 4% from the first quarter of last year. Backlog at the end of the quarter was $434.2 million, and the book-to-bill ratio was 1.04:1. Gross bookings were $238.3 million, up 2% from the fourth quarter gross booking and up 7.5% from the first quarter of 2012, before a downward $7.6 million or 3.3% reduction of the backlog due to changes in foreign exchange rates.

Moving to Slide 4, first quarter revenue of $221.2 million was up 1.7% from a year ago and down 4.2% seasonally as expected from the fourth quarter. Compared with the year ago, organic revenue growth in the quarter was 1%, acquisitions at a 2.9% and the impact of foreign exchange rates reduced revenue by 2.2%.

Looking at our new reporting segments on Slide 5, Science revenue was up 15.4% compared with last year's first quarter on the strength in Materials and Life Sciences. Organic growth was 13.9%. The acquisition of VSG added 5%, and foreign exchange movements reduced growth by 3.5%.

Industry revenue was down 11.3% compared with last year as growth in natural resources is offset by the expected cyclical decline in electronics. Sequentially, Industry revenue was up 8.2% with growth in both electronics and natural resources.

Turning to Slide 6, revenues showed FEI strength in Asia. North American revenue was down 4% from the fourth quarter and 1% from last year's first quarter and made up 31% of the total. Europe was down 7% from the fourth quarter, 4% from the first quarter a year ago and made up 30% of the total. Japan and Asia together were down 2% from the fourth quarter, up 2% from a year ago and made up 39% of the total.

Now, looking at Slide 7. Gross margin in the quarter was 46.4% compared with 47.2% in the fourth quarter and 45.1% a year ago. We had an usually large contribution of revenue from Japan in the first quarter, and the weakening of the yen compared with the dollar reduced gross margins by approximately 50 basis points. The Industry and Science gross margins increased compared with last year's first quarter. Industry margins increased compared with the fourth quarter while Service margins were particularly impacted by the weakness of the yen and were down sequentially -- I should say Science margins, not Service margins. We expect the smaller portion of our revenue will come from Japan in the second quarter so the impact of margins will be less, assuming the yen stays in its current range.

Service margins were -- also remain at high levels, up from last year's first quarter but down modestly from the fourth quarter. This second quarter, we expect our gross margin to improve slightly from Q1. We believe we are on track to achieve our 50% goal by mid-2015.

Turning to Slide 8 and moving down the income statement, operating expenses excluding restructuring expenses were $68.3 million compared with $69.4 million in the fourth quarter and $64 million a year ago. R&D for the quarter was $24.8 million or 11.2% of sales. We're estimating operating expenses in Q2, exclusive of restructuring charges, to be up slightly from the first quarter due to added R&D spending for second half new product introductions. Restructuring charges in the first quarter were $695,000 compared with $2.9 million in the fourth quarter, primarily for severance as we previously announced. Restructuring charges reduced GAAP net income by $0.01 in the first quarter and $0.05 in the fourth quarter. We expect restructuring costs of approximately $600,000 or $0.01 per share in Q2.

GAAP operating income for the quarter was $33.5 million compared with $36.6 million in the fourth quarter and $34.1 million in last year's first quarter. Nonoperating expense was $1.5 million in the first quarter compared with $2.5 million in the fourth quarter and $2.1 million in last year's first quarter due primarily to reduced foreign currency cost. We expect nonoperating expense to be around $1.5 million in Q2 and then to drop to around $1 million per quarter after our 2 7/8% convertible notes mature on June 1.

Our tax rate for the first quarter was 16.3%. A lower tax rate in Q1 is due mainly to the R&D tax credit extension in the U.S. that was passed retroactively on January 2, but the 2012 credit could not be taken in the fourth quarter. We expect the tax rate will be approximately 20% in the second quarter.

GAAP net income was $26.8 million and GAAP EPS was $0.65 per diluted share at the high end of our guidance range. The weighted average shares per diluted EPS from Q1 was $42.1 million.

As you can see on Slide 9, our balance sheet remains very strong. Total cash investment and the restricted cash at the end of the quarter was $441.6 million, an increase of $24.6 million from the end of the fourth quarter. Net cash at the end of the quarter after subtracting debt was $352.6 million or $9.16 per share. Our only debt is a convertible note that matures on June 1 of this year, and it is likely to convert to equity. The shares in this issue are already included in our diluted share count for EPS purposes. Assuming the notes were converted to equity at the end of Q1, cash per share would increase to $10.62.

Cash flow from operating activities is a subject of increased focus for 2013. It was positive $34.8 million in the first quarter compared to negative $32.2 million in the first quarter of 2012. EBITDA for the quarter was $40.7 million. Days sales outstanding improved from Q1 a year ago and inventory turnover was level with the fourth quarter. Capital spending was $5 million for the quarter and depreciation expense was $5.8 million. For the rest of 2013, we expect capital spending to increase as we proceed with our previously announced new factory in the Czech Republic and continue to invest in R&D and other parts of our business to support our growth.

With that, I'll turn the call over to Don for comments about our markets and outlook.

Don R. Kania

Thank you, Ray, and good afternoon, everyone. FEI had another good quarter in a mixed global economic environment with headwinds from a significantly weaker Japanese yen and a slow U.S. market contrasted with global strength in the Science business.

Total orders were $230.7 million. Orders were up 4% from last year's first quarter and up slightly from the fourth quarter. Of the 4% increase from last year, organic growth contributed 7.6%, acquisitions added 2% and the impact of foreign exchange subtracted 5.6%. Science orders made up 55% of the total, and Industry made up 45%.

Science bookings of $126.2 million were up 30.5% from last year's first quarter. The book-to-bill ratio for this segment was 1.03:1. On an annual basis, organic growth was 37.4%, VSG added 3.6% and foreign exchange rates reduced orders by 10.5%. Growth was driven by Material Sciences and Life Sciences. Both grew by more than 25% on an annual basis. We had a strong quarter for our Titan systems with all of the orders from outside the United States. Life Sciences had significant wins in Japan benefiting from their stimulus program, and TILL had record orders. We also saw initial orders for our correlative microscopy products that were announced in November and the Tecnai Arctica that was announced in January.

Industry orders were $104.5 million, up 12.4% from the fourth quarter but down from last year's record low. These changes were driven by the semiconductor equipment business cycle as we saw the expected improvement from the low point of 2Q. Electronics saw significant orders from several key customers in the first quarter. Conversations with these customers reinforce our view that this segment will improve through the year as FEI continues to outpace the industry in all phases of the cycle.

Bookings for Natural Resources part of the Industry segment were down after rapid growth last year. Orders have been delayed due to reduced commodity prices and cautious outlook. In addition, we have noticed that orders have been weighted towards the second half of the year in the last couple of years. We expect acceleration in Natural Resources orders as the year progresses.

Looking at geographic bookings on Slide 12, Asia and the rest of the world were strong compared to last year and to the fourth quarter. Europe was up annually. The U.S. was down compared with both periods. Korea and Japan were particularly strong this quarter and China continues to be a very solid market for us. The Science market segment did well despite continued weakness in the United States. Six countries outspent the U.S. on our science tools in this quarter. Geographic diversity remains a strength, with orders totaling $2 million or more from 13 countries in the quarter.

As we look to the second quarter, we currently expect bookings on the Science segment to be approximately flat sequentially as we maintain a conservative view of prospects in the United States. We expect sequential improvement in the Industry orders. As usual, Electronics orders will be dependent on the timing of bookings from a few major customers.

Turning to Slide 13, you see the quarterly history of orders since 2006 of our Science and Industry bookings. There are several patterns I want to point out. While our Science bookings do have some variability by quarter, in general, they have fairly consistent growth on an annual basis and a seasonal pattern of strength in the third and fourth quarters. We believe it is most useful to look at this segment on a year-over-year basis.

The Industry business led by Electronics does not have a seasonal pattern. Instead, it is a cyclical growth business. The implication of that pattern is that it's most useful to look at this business on a sequential basis rather than year-over-year. In both cases, because of our high average selling price, there's always some variability by quarter. Beyond today's quarterly results, we hope this information is useful for investors who are interested in understanding FEI from a long-run perspective.

Slide 14 is a summary of our guidance for the second quarter of 2013. We forecast orders to be greater than $230 million, which, if achieved, would be a second quarter record and above seasonal levels. We expect revenue in Q2 to be in the range of $222 million to $231 million.

GAAP earnings-per-share is expected to be in the range of $0.62 to $0.71, including approximately a $0.01 per share charge for restructuring. We know that the revenue growth is lagging bookings growth. This is affected by the longer time to revenue for Titans, which were strong in Q1, and the seasonally strong service orders in Q1, which will revenue throughout the year. As we rotate the growth in electronics, we expect a shorter time to revenue to meet customer expectations.

Looking at the full year 2013, we continue to expect revenue growth for the full year to be in the 5% to 9% range. This will require significant revenue increase in the third and fourth quarters. For Materials Science, recent year-over-year growth in orders has been strong. The backlog is up, and we expect continued growth outside the United States. Orders funded by the U.S. government agencies in the first quarter made up less than 1% of the global total.

For the industrial part of the business in 2013, in addition to continued growth in Natural Resources, we expect that Electronics will accelerate, driving revenue growth in the second half. A combination of the semiconductor industry cycle with the ongoing move to smaller nodes, new materials, new structures such as FinFET continues to drive demand for TEMs and DualBeams. These favorable technology trends and our own discussions with key customers support our view.

A strong flow of new products will also drive order growth in the second half for both Science and Industry with significant revenue coming in 2014. We will have an opportunity to update our progress and our growth strategy, margin expansion and to describe new product launches when we hold our New York investors meeting again this year. It will be on Thursday, June 6, and we hope to see you there. You should have already received an invitation. If you would like to attend the meeting and have not already registered, please contact Fletcher. With that, Operator, we are now ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Patrick Ho with Stifel Nicolaus.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Don, as you mentioned about some of the changing the process technologies in the semiconductor space, whether it's FinFET or 3D NAND, maybe first with FinFET. How much of a, I guess, a percentage increase or maybe total dollars for you do you see an increase going from some of the planar structures to FinFET with the foundries for you guys specifically?

Don R. Kania

Yes, it's hard to give that level of detail. And I think where we like to point people to is really looking at the aggregate over the cycle. And Fletcher's actually got some new analysis on the most recent data points. But FEI relative to semi CapEx overall has exceeded the CapEx performance by 10-plus percent and 2x over our trough added to the data that we had in the past. And so what I would say is the way we view it is we see the opportunity for, at a minimum, that kind of growth above the industry and perhaps a little bit more as intensity increases as we get to these more challenging structures. And as we get to the individual, whether it's microprocessor company or memory company, we're seeing the challenges continue to become more and more present. So I mean we feel good about the growth prospects going forward. And I think we reflected some of that in our views of acceleration on orders and revenue as we go into the second half of the year.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Great. And maybe just a quick follow-up to that. So it's right to characterize the 3D NAND is the same kind of opportunity of, I guess at the very least, increasing usage of your tools on a going forward basis?

Don R. Kania

Yes. In fact, I think we'd say that the opportunity for growth there is, on a percentage basis, is very large since we don't touch that today, right? But I -- let's just say we've had really good conversations and we have some equipment opportunities that we're developing that will directly address some of those issues.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Great. Final question, a follow-up for me in terms of your Life Sciences business. I know a lot of your correlative microscopy opportunities are second half as well as 2014. At least near term, is it still what you're seeing, a more structural biology? Or have you seen any pickup or traction on the cellular biology side of things?

Don R. Kania

Yes, on the cellular biology side, we have seen our first orders in the correlative products. And that's obviously a good way to get started. They are at muted levels, but also from thought leaders that help us propagate that success as we go into the second half. So I think we feel like we've got, if not spot on, close to the right products available for those customers. And now, it's really a bi-cycle kind of activity that we have to go through in the adoption. So we should see some revenue in the second half. And if we continue our success, that will accelerate into '14.

Operator

Our next question comes from the line of Chris Godby with Stephens, Inc.

Chris Godby - Stephens Inc., Research Division

I guess, first of all, can you give us some more color on Natural Resources in the quarter? And to make sure I caught this right, it sounded like they were down. I'm not sure if that was year-over-year or quarter-over-quarter. But maybe could you give us some more detail there and break it out into both oil and gas and mining?

Don R. Kania

Yes, we're not going to give too much color. But I think it is down -- I mean, both of those ways. We had a record in Q4, so coming down off of that was going to be expected. But we were down a little bit from previous year. And as I commented, the -- we saw, with the volatility, the negative trends in commodity pricing, we saw a lot of tentativeness on customer's part. Essentially, they got distracted in some instances away from looking at technologies to dealing with the short-term interest of the business. We think we can look through that, and the customers will look through that as our value propositions continue to improve, especially in the mining segment, which I think we highlighted a little bit last call, that we're starting to see some real strong pull there. That people actually can do the arithmetic and see returns. And we think that becomes a new piece of the opportunity along with the oil opportunity for growth. But yes, to be clear, it's a little bit slower in the first quarter than we had anticipated. We think we understand why and we think it'll be a growth year for the segment, and we'll accelerate as the year goes forward.

Chris Godby - Stephens Inc., Research Division

Hopping over to the Tecnai Arctica product, how has traction been with that so far?

Don R. Kania

We're very early with a couple million dollar product. But we've got our first units out there. The pipeline has grown very quickly for the product. We think -- we're taking Krios class technology with a value -- lower performance, but useful performance to the users in the area at half the price. And given -- particularly in the U.S., the budget situation we think is going to be a very attractive product across the globe, but particularly the U.S.

Chris Godby - Stephens Inc., Research Division

Any concern at all with possible cannibalization of sales from the Krios there? Do you think that it's differentiated well?

Don R. Kania

I think it's very well -- we work very hard on that. And you can imagine that was question one from me as we looked at distinguishing that product. But it very much follows our traditional, if you remember, we have the Tecnai, which is the midrange TEM, and the Titan at the high end. It mimics that exactly, and so the optical systems which are the core of the imaging capability are significantly differentiated. But as we've learned in the structural space, you can provide -- you can still provide a lot of value to customers with that lower resolution.

Operator

Our next question comes from the line of Joe Maxa with Dougherty & Company.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

I wanted to talk a little bit more about the gross margins. I think you said a 50-basis-point impact from the yen and flat sequentially. We're at similar revenue levels as much of last year. Gross margin seems to be down except for Q1. Getting to 50%, how do we see that progressing again? I think you talked about step functions. Should we be thinking maybe a 1 percent a year type, or how do you get to that 50% again?

Raymond A. Link

Joe, this is Ray. Great question. There's a couple of pieces of that, that are pretty elemental in terms of having us achieve our margin profile. The first is that our Electronics business needs to be about 1/3 of our revenue. We've been pretty consistent with that throughout, and it was obviously down in Q1. So that was a drag. But in terms of the programs that we're working on, I would think of it as generally about 1% a year. And we've got internal targets. We need to hit that to make our own internal targets in any event. So there's not one item that raises it, but it's a combination of new product offerings. I think we'll see that in our Science business. We had good margin last year, and I think as we roll out our new products in Life Science, both the correlative products, which particularly, the core side is essentially a high-end accessory that has good margins, and the Arctica product that Dan talked about, it was designed with a reasonably good COGS, so we can sell that at decent margin, coupled with more software content, we should start seeing more benefits from our VSG acquisition. And just with the overall new products that we'll be rolling out over the next couple of quarters are all designed to have higher gross profit margins. In addition, we have a number of operating activities within the factories that are just designed to be more efficient. And the last thing that kind of takes us to that, the promised land of 50% is the completion of our new factory in the Czech Republic. When we're fully operational there, that will help quite a bit because we're currently operating in 3 non-connected, old, not well-laid out factories. And this will be a very new, modern, well-laid out factory. So to summarize, it's a combination of new product flow. I think we're going to start seeing that in the Life Science. You'll start seeing that with some of the new products we're going to be introducing over the next couple of quarters, more software and just overall COGS reduction in a variety of programs, whether it's in the factory or with working our supply chain.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

That's helpful. And, Ray, when is that completion of that factory expected?

Raymond A. Link

It'll be completed in 2014, but we won't have it fully operational. We won't really get the full benefit of that until Q1 of '15.

Joseph A. Maxa - Dougherty & Company LLC, Research Division

I see, okay. That's very helpful. And then, I just wanted to touch base on the service and component sales being down sequentially in Q1. It's normally flat or up quarter. Can you just kind of give us a little more color on that business and the expectation for Q2?

Raymond A. Link

Yes. The primary reason it was down was the currency movement. So that was impacted by yen. That business is generally an up business. It's up a little bit each quarter. Frankly, we've been thrilled with our overall progress in our Service business. It's now north of a $200 million business for FEI, and it's a nice recurring revenue stream and margins have increased pretty steadily over the years. And one quarter versus another quarter is not that big of a deal, but we're still pretty optimistic on Service being a solid contributor this year to FEI.

Operator

Our next question comes from the line of Jim Ricchiuti with Needham & Company.

James Ricchiuti - Needham & Company, LLC, Research Division

I wonder if you could talk a little bit, Don, about the competitive environment, if you're seeing any change from your Japanese competitors in the market just in light of the currency movement.

Don R. Kania

Our -- something I check on daily and get a little sleepless over. The movement of the yen has been, what? 15%, 20% in the past 4 quarters. And certainly would strengthen their positions. But I have to say, we haven't seen any pricing activity that we see as directly related to that change. And if you look at the latest results from both our competitors, their financial results, I would hope and I assume that they're going to take whatever benefits they can garner here and make their businesses profitable. They've not done well in the past few years. Hitachi, the information just came out and JEOL traditionally has been losing money over the past few years. So I think there's a lot of pressure on them to take this to the bottom line, make more money, please their shareholders a little bit. And so that's the status today. We're very watchful of it, and we think we still have differentiated product offerings which command a premium and that doesn't really change if they come in discounting aggressively. But we haven't seen that.

James Ricchiuti - Needham & Company, LLC, Research Division

Okay, great. That's helpful. And I wonder if you could talk a bit about the range of revenues growth for the year as a whole? And maybe this ties a little bit into the -- Ray's comment about the Electronics business, where it needs to be to really get the margins to where you see some expansion. If we look at the high end of the range, are we thinking in terms of maybe 1/3 of the business or a little bit more coming from Electronics? What gets you to the high end of the range, I guess, is where I'm going with this.

Don R. Kania

Yes, and I think the -- your intuition is correct. that we view -- Electronics would be the disproportionate grower half to half, and that would contribute more. And so we'd probably see a little faster move on margins than Ray described, which probably targeted at the midrange. So you can do the arithmetic, your version of that arithmetic to figure out what the impact is. But yes, that's the -- to the high end of the range, Electronics has to deliver.

James Ricchiuti - Needham & Company, LLC, Research Division

And then what about some of the other markets, what would you be -- you rank next, and then following that?

Don R. Kania

Yes, I think we just have to continue to have the Sciences, the rest -- the Sciences business delivering a really nice growth this quarter in the order flow. And we think that can continue sort of at the level at that. And then Natural Resources, we also described an acceleration in the second half. Again, we feel pretty good about all these things. And so it's -- the quarters will tell the tale. But we hate to be in this situation, we're always calling the second half is going to be better. But I think we've got enough data points and history with customers and understanding of these markets that we certainly will see a second half lift, and then it's a question of magnitude and probably the bulk of that would be controlled by timing in semiconductor because there is always -- they have a tendency to be, with the fewer number of customers today, a little bit episodic. And so that timing is very, very important.

James Ricchiuti - Needham & Company, LLC, Research Division

Got it. Just with respect to Natural Resources, do you really have enough history on that to feel comfortable with the second half recovery?

Don R. Kania

Yes, I'd think we've got a couple of years, okay? And so we sort of see that, but it's not just based on that pattern. It's also based on pipeline. And again, conversation with customers about why didn't you place your order in Q1? People were distracted with -- their management focusing very much on the volatility in the commodities pricing in particular. So I think we've got some winning formulas here, we've got customers engaged. And this was really about timing.

Raymond A. Link

If I could just add to that, Jim, on the -- and Don touched on this when he talked about the orders, we had -- the Sciences had very good order flow in Q1 and we had a large number of Titan class products that were booked in Q1. And those products generally take longer than a quarter to revenue. So we're really not going to get much benefit in Q2 from the orders we got, particularly at the high end in Sciences. So that spills over to the second half, which further helps explain why we're bullish on the second half and are sticking to our targets of the up 5% to 9% overall revenue growth.

Operator

Our next question comes from the line of Tycho Peterson with JPMorgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

I think you mentioned TILL had record orders. Can you just talk, does that now include correlative microscopy products and maybe just talk about the competitive dynamics? I think we've seen less than stellar numbers from some of your peers. So are you pulling share there?

Don R. Kania

Yes, I am. A little bit color on that. Yes, it does include correlative products. And I think we feel like we have a better positioned product than our competitors in this space. They've taken particularly ZEISS, but the approach they've taken is less cohesive and we believe doesn't really fit the current view of where the value add in the flow for Life Sciences is. And, of course, that's going to evolve over time. But I think we feel pretty good about the products we have out, the 2 products we have out there right now. And we got one offering that the others -- nobody else can offer in the world, which is the integrated TM and optical microscopy in one platform. So time will tell, but we feel good about it. And I think we're -- we did the right thing.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And then can you comment on just some of the other Life Science initiatives, Living Lab? And then just talk about your thoughts on the academic markets and what you're seeing?

Don R. Kania

Yes, I was just at both lately. So I was out at NIH a couple of weeks ago, and the Science is going great. The funding environment is not so happy, which is the unfortunate truth right now. I think the sequester thing caused tremendous uncertainty, and I think as we all know in -- particularly in the academic market place, the scientific marketplace, that usually causes people to get conservative on spending in a -- early in a fiscal year. And we're sort of midway for them mostly. So the hope is once the fog starts to settle down and people know where the money is going to be, actually the perverse effect and the advantage for FEI is it'll free some of the spending, which, as we highlighted, has been slow in this part of the world. The rest of the world, pretty robust spending. We feel people are appreciating the products that we offer and buying our high-end tools just to comment on the strong Titan orders across the Science segment. So that's the kind of the yin and the yang right now of -- for Life Science piece and the Science piece in general.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And then just one follow-up on Natural Resources. You've talked about frac-ing maybe being an interesting opportunity. Can you talk as to whether those discussions with customers are picking up at all?

Don R. Kania

I think they're continuing with some robustness. I have been visiting both some researchers in the area and some customers and talking with customers in the area. And my favorite quote is one of the large companies in the frac-ing oil and gas business. It won't drill a well, it won't finish -- complete, won't complete a well until they've looked at the data on an FEI tool. And I think that's a pretty important statement that understanding the details of the rock and the associated rock physics is the general jargon of fracturability, processing [ph] and permeability are very, very important parameters as the unconventional space -- this is Don now, this is my point of view, is going down the learning curve. Everything has been sort of generic. You could make money. Now, people are saying how can we optimize this process? How can we have specific applications for a specific drill, a drill site or for a specific field area. And that's where we're starting to see people put a lot more effort because the economic returns can be quite compelling if you can garner more efficiencies in that process.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And then just one last one, capital deployment. Talk just on your thoughts on buybacks versus M&A. Are you seeing more interesting acquisition candidates in this environment?

Don R. Kania

I would say right now, M&A looks quite interesting. Right now, it's -- things are becoming -- visibility to availability of some assets that we've been interested in has increased significantly in the past weeks even. So we think that's an interesting activity going on. So -- and maybe not that we often bid against our friends at Thermo, but Thermo's obviously heavily involved with that major transaction right now. So they're kind of -- we expect them to be a little bit on the sidelines for a while. So -- but overall, I would say vectors in -- the number of potential targets is going up and that excites us about the ability to add some new things to FEI.

Operator

Our next question comes from the line of David Duley with Steelhead Securities.

David Duley

A couple of questions. As far as your Electronics business, could you talk about which markets you're seeing strength of, foundry, memory, logical, whatnot? And when we see the accelerating orders, I guess, in the second half, what's that driven by?

Don R. Kania

I think, number one, we don't manage the business. We manage it customer by customer more so than by the foundry blah blah blah, and plus the leaders in those areas are pretty easy to identify. I would say that when we look at what the acceleration wraps around, it's the relentless pursuit of smaller and faster. And as we go to smaller feature sizes, the challenges of controlling -- developing and controlling process are clearly far more difficult than they were at the larger nodes. And the tool of choice that people are reaching to that's new on the stage is the FEI solutions suite. And that's what gives us real good confidence. And then we look at -- now that we're more important to the leaders in capital spending, we get better views of their roadmaps which couples us more tightly on our product development to what their needs are going to be and gives us confidence that we can continue to maintain large market share in providing solutions to these customers.

David Duley

And you talked about the timing of orders, I think in the sector a couple of different times. Are there some large orders hinging on certain deadlines or just a little bit more color on that?

Don R. Kania

If you're running a segment that, let's say, in a good quarter is doing $70 million, $80 million, $85 million, and you've got $15 million, $20 million orders rattling around, of course, it gives you pause that if they slip over a quarter boundary, which we will let them do rather than discount to keep them in the quarter, right? We're going to focus on the long-term financials. That's always -- that's the case we're up against occasionally. So we watch carefully and manage the business appropriately. That's really what the comment refers to is there's a granularity when you have 8, 10 customers, total of which 4 highly dominate the segment.

David Duley

Okay. And the final question for me is to hit this revenue target that you're talking about for the year, could you just remind us perhaps what the 2 or 3 most important factors are? I suspect they're similar to the current quarter. But just what are the 2 or 3 most important things to hit the revenue guidance for the year?

Don R. Kania

We need the Electronics to do what we said it's going to do, which is have a second -- stronger second half. That is orders and revenues, customers -- typically, orders and revenues are going to be closely coupled in that segment so we feel good about that, plus the timing issue. We think that demand is there, but if it moves out 1 quarter or 2, well, maybe we'll be wrong. I don't think so. We feel pretty strongly that the demand is there, and it's more driven by technology than capacity. And you just don't relax on technology. And I would say more front and center where several of our -- with all of the major players, technology has become a front and center differentiator and against the rest of the masses of the industry. So I think we're fully aligned with the economics on that front. I think Sciences globally has got to stay strong. The U.S. improves, that's upside. We're really not -- we're I guess, pessimists on the U.S., at least from FEI's perspective. So any improvement there would be good. But I think those are the 2 major drivers. Second half recovery on Electronics, and Materials Science is staying the course with global strength.

David Duley

Okay. And just a housekeeping question. Did you have a 10% customer either on order for revenue?

Raymond A. Link

No, we have not.

Don R. Kania

No.

Operator

Our next question comes from the line of Derik De Bruin with Bank of America.

Derik De Bruin - BofA Merrill Lynch, Research Division

So can you talk a little bit more about the FX headwinds? I guess, what are you expecting in 2Q and what's embedded into your full year expectation for FX? I'm just also wondering how much the yen is impacting your 2Q bookings guide and your EPS guide. Just general comments in FX overall, and then specific on the yen on the second quarter.

Raymond A. Link

Sure. Overall, when we look at Q2, we are expecting lower revenue from Japan than in Q1. We happened to have an all-time record revenue in Q1 at the exact time that the yen was at its weakest point in the past, about 5 years or so. Our expectation is that yen stays where it is. The best estimate of where the future is going to be is the current spot. So we're pretty much planning the quarter at yen around JPY 100, planning on the quarter at euro $1.30 plus or minus. And those are already baked into both our revenue and our bookings guidance. So -- but the main issue is that Q2 will have less impact to FEI if the yen were to move again simply because we'll have less revenue in Japan just based on what's on the books and what we plan to shift. And that's one of the reasons we feel a little bit better about the margin going up because the impact won't be -- shouldn't be as big in Q2 as it was in Q1.

Derik De Bruin - BofA Merrill Lynch, Research Division

Great. And just -- I'm sorry, but just an overall FX headwind number baked into your 5% to 9% full year guidance?

Raymond A. Link

Essentially, we're taking the current rates and just putting them forward. So we've lost, obviously, relative to Q1 on the yen. So that costs us $3 million, $4 million, and it'll cost us a little bit in Q2. But the rest -- we deal with this all the time, Derik, so...

Don R. Kania

We take the persistence view of currency. And what it is today is what it'll be tomorrow.

Derik De Bruin - BofA Merrill Lynch, Research Division

I'm basically just trying to get to an organic revenue growth guidance number for the year. It wasn't that [indiscernible] the 9% number.

Raymond A. Link

I think it's fair to probably take about $5 million off the currency, that we were going to have to make up to make our range.

Derik De Bruin - BofA Merrill Lynch, Research Division

Okay, and I guess could you talk a little bit about I guess -- academic clearly weak. But did you -- a couple of your competitors in the [indiscernible] instrumentation space and Material Sciences space sort of noticed or commented on seeing some sharp slowdowns maybe at the end of the quarter? Anything in terms of pacing during the quarter and particularly in the academic and government sort of accounts, was there anything unusual in Japan? And I guess, with this -- we're -- you expected the states to sort of suck in terms of demand. I guess, was it suck-ier than you expected?

Don R. Kania

We -- as you know, we've been pretty negative on the performance of the U.S. for the past few quarters. So no, I think that achieve forecast, we have a tendency to be back-end loaded. And since we delivered, I think particularly from an orders perspective, a good quarter, there was no flashing, no doom and gloom. I think generally, and maybe some of this is we're higher ASPs, so those cycles are visible to us. I think we look at Europe, we look at Asia. We had great strength in Japan. We benefited from their stimulus. We'll probably continue to get a little bit for that. And China remains robust. Cryo was -- it happened to be particularly strong last quarter. And we continue to make investments in distribution around the globe. So I don't sense right now -- and pipelines, which is the other thing we look at, remains good. So we're not seeing -- I don't have a -- we didn't nor have we expressed a negative tone on outside of the United States for the next quarter or right now for the year.

Operator

Our next question comes from the line of Tom Diffely with D.A. Davidson.

Thomas Diffely - D.A. Davidson & Co., Research Division

Maybe another question on the Electronics side. So, Don, when you look at your business there, is it primarily driven by new capacity or do you also get some business driven by memory fab conversions even if the capacity level is not going up? Or even a large ...

Don R. Kania

Predominantly -- we're predominantly driven by technology. And so if they upgrade a line to finer nodes, that's a benefit to us. And we will get some additional business from that. So that's the main driver and that continues to be the main driver. Technology, technology, technology.

Thomas Diffely - D.A. Davidson & Co., Research Division

So is this then going back in having to add new -- just more of your tools per lab in the fab?

Don R. Kania

That's right. It's smaller nodes. We've seen that trend, and the large customers where we do have these kinds of discussions have indicated that, that will -- that trend line will continue.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And then you didn't mention anything about hard disk drive. Any of that activity?

Don R. Kania

I don't think we had any orders in the quarter from those cast of characters.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. Is that part of the ramp in the second half then?

Don R. Kania

No. We treat that as opportunistic. There'll be some. Before the end of the year, I'm sure there'll be some purchases. But the semiconductor piece of the puzzle is by far more so than in the past dominant in the segment.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And then over the last year or so, has there been any improved or increased competition at the high end, the TEM side of the business? Or is really competition still at the mid and low end of the range?

Don R. Kania

We have competition at the high end. The JEOL -- JEOL product has been there, shot a little below the top end to high and sort of poked at us, I think we described this a while ago, in between our Tecnai and Titan offerings. And we've made some adjustments there in the product line. And I'll just say stay tuned. Come to Investor Day, and you'll learn a little bit more.

Thomas Diffely - D.A. Davidson & Co., Research Division

And then Ray you talked a lot about the yen. Was there any specific euro impact in the quarter?

Raymond A. Link

Not really. The euro was pretty flat for us, minor impact from the Czech koruna. But pretty much all within manageable levels. That was really an incredible move of a bit large currency in these last few months.

Thomas Diffely - D.A. Davidson & Co., Research Division

Oh, yes. Okay, and then also I guess last thing here is, Ray, we look at the taxes on a long-term basis, you said 20% next year. Low 20s still kind of your long-term view?

Raymond A. Link

Yes, our long-term view is 20%. That's what we're managing towards.

Thomas Diffely - D.A. Davidson & Co., Research Division

Okay. And that's driven by a somewhat permanent R&D tax credit in Netherlands as well?

Raymond A. Link

It's not so much to R&D tax credit. That's an impact, but not a lot. That's -- it really has to do with our overall structure, the way we utilize what is known as the Innovation Box in the Netherlands, which allows for us to have a lot of our income taxed at a 5% rate. And then we also have a fairly low tax rate in the Czech Republic, 19%, and we get a double deduction for R&D. So those 2 favorable rates offset the high rates in the U.S. and Japan.

Operator

Our next question comes from the line of Jairam Nathan with Sidoti.

Jairam Nathan - Sidoti & Company, LLC

This is Jairam from Sidoti. Just on the yen impact, Ray, can you tell us what the -- what percentage of cost is yen-based? And I'm just trying to figure out whether it's more of a transaction impact or translational impact?

Raymond A. Link

The first part of the question was the cost of the impact? You mean in terms of the EPS or ...

Jairam Nathan - Sidoti & Company, LLC

No. The -- what percentage of your cost structure is in yen, is yen-based?

Raymond A. Link

Oh, I got it. I got it. No, we don't have a ton of cost in Japan. We've got about 80 employees or so. It's largely a sales and service office. We don't manufacture in Japan. So we're effectively long yen because we sell into it. We sell it -- our products that are manufactured in the U.S. or in Europe into Japan in yen. And so they're priced in yen and that's why we had the impact. And that's pretty similar to a lot of companies in their space that just have sales and service. Not too many people are manufacturing in Japan anymore. So our cost structure isn't real high relative to our revenue.

Jairam Nathan - Sidoti & Company, LLC

Okay. And just one other question I had was on the regime change in China. Do you see any -- I know it's early days, but do you see any impact or any changes in their thinking as far as R&D spending?

Don R. Kania

No. I think the fact that there is one thing that's going to maintain continuity with regime changes, the 5-year plan which came the year before the regime change, which highlights several impacts of science and technology investments that are favorable to FEI.

Operator

[Operator Instructions] And I'm showing no additional questions in the queue. I would like to turn the conference back to Mr. Chamberlain for any closing remarks at this time.

Fletcher Chamberlin

Thank you very much, everyone, for tuning in and listening. I will be available this afternoon and tomorrow. Ray and Don have to run into some employee meetings, but we'll also be available over the next week or so if you need to talk. So we're open. Thank you very much, and we'll see you in June in New York.

Operator

Thank you. Ladies and gentlemen, this concludes the FEI First Quarter Earnings Conference Call. We thank you for your participation. You may now disconnect.

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FEI (FEIC): Q1 GAAP EPS of $0.65. Revenue of $221.2M beats by $0.31M. (PR)