FEI Company's (FEIC) CEO Don Kania on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: FEI Company (FEIC)

FEI Company (NASDAQ:FEIC)

Q2 2014 Earnings Call

July 30, 2014 05:00 PM ET

Executives

Fletcher Chamberlin – IR and Communications Director

Don Kania – President and CEO

Ray Link – EVP and CFO

Jason Willey – IR Director

Analysts

Patrick Ho – Stifel Nicolaus & Company

Amanda Murphy – William Blair & Company

Derik De Bruin – Bank of America Merrill Lynch

Isaac Ro – Goldman Sachs

Tycho Peterson – JP Morgan

Tom Diffley – D.A. Davidson

JoAnne Feeney – ABR Investment Strategy

Brad Mas – Needham & Company

Operator

Good day, everyone, and welcome to the FEI Second Quarter Earnings Conference. As a reminder, today's presentation is being recorded. At this time, I would like to turn the conference over to Fletcher Chamberlin. Please go ahead, sir.

Fletcher Chamberlin

Thank you, operator. Good afternoon, ladies and gentlemen. As the operator said, I'm Fletcher Chamberlin, FEI's Investor Relations and Communications Director. With me today at our headquarters in Oregon are Don Kania, our President and CEO; Ray Link, EVP and CFO and Jason Willey, our new Investor Relations Director, who will be taking over for me in the coming months. We appreciate your interest in FEI.

We've again posted some slides under Events and Presentations in the Investor Relation's part of our website, fei.com. We will refer to these slides during today's call. We'll focus our comments on the significance, so the numbers rather than a recitation of the data that's available in the release are on the slides. We welcome your comments on whether the slides and tables are helpful, and suggestions for improvements, if you have them.

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 statements to the extent that we discuss expectations about future orders, revenue growth including revenue recognition expectation. The timing of order and revenues, gross margins, expenses, capital spending, restructuring expense, our tax rate and earnings, growth expectations for particular segments of our business or for new products, new applications for our products or acquisition, market conditions and trends including technology adoption trends, in the semiconductor industry, potential increase cyclicality, manufacturing efficiencies to be gained from our new factories, demand for new product, potential penetration of new markets and government spending for research tools in various countries and regions, as well as 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. Risk factors that could affect these forward-looking statements are cited in today's press release on Slide 2 of the slides posted in this call and in FEI's most recent 10-K, 10-Q and 8-K documents and other filings with the SEC.

Investors are urged to read these documents, copies of the SEC filing. Filings are available free of charge on the Commission website, at sec.gov or 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 and will be archived in the Investor Relations section of the 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'll be glad to take your questions.

Ray Link

Thank you, Fletcher and good afternoon, everyone. Q2 was a solid quarter, orders of $259 million were record for any quarter and backlog is it in all time high of $517 million. Revenue was up 7% from a year ago and was the highest ever for the second quarter.

Revenue in earnings were within the guidance range announced with our first quarter release. We have now recorded 33 consecutive quarters of GAAP profits. Moving to Slide 4, second quarter revenue was $237 million with a book-to-bill ratio of 1.09:1 and revenue was 5% higher than the first quarter.

Both year-over-year and sequentially, industry revenue growth was offset by a decline in Science. Slide 5 has more detail on the makeup of revenue in each segment, showing that acquisitions and foreign exchange had relatively minor effect on the growth rates.

In Science, sales were impacted by timing of large system shipments and the previously announced weakness in material science research orders in the first quarter. Orders as expected rebounded in Q2 and the book-to-bill ratio for the Science Group is 1.36:1 for the quarter.

The Industry Group had record revenue in the quarter up 23% from last year's second quarter and 28% from this year's first quarter. The growth was driven by our semiconductor customers. Revenue from our natural resources customers was down sequentially in year-over-year due to the ongoing weakness in mining, as a segment we are deemphasizing.

Turning to Slide 6, revenues again showed our geographic diversity. Asia made up 39% of the total Europe, 27% and North America, 34%. North American revenue was a record of 31% from a year ago driven by improvements in both Science and Industry.

Turning now to our expenses, as we announced in early June, we had a number of realignment charges in the quarter affecting both gross margin and operating expense. Those total $5.9 billion and are detailed in the reconciliation table attached to our press release.

Slide 7 shows gross margin in the quarter of 46.4% compared with the 47% in Q1 and 48% a year ago. After excluding the inventory write-off related to our realignment activities, our non-GAAP gross margin was 46.7%.

While the quarter included increase revenue from the higher margin industry business. Margins were lower than normal, due to the timing and mix of products. We remain committed to our target of 50% gross margin by mid-2015 based on the forecasted margins and orders in our backlog, expectation for new product margins and operational improvements including our new factory in Czech Republic. We expect gross margins will improve from Q2 levels in the second half of 2014.

Turning to Slide 8, GAAP operating expenses were $79 million compared with $75.4 million in Q1 and $68.4 million, a year ago. As shown on Slide 9, GAAP operating expenses includes the total of $5.2 million of cost related to our consolidation of facilities from earlier acquisitions, restructuring activities, moved cost for the new Czech facility and acceleration of an acquisition related earn out.

Excluding those cost and the restructuring charges from Q1, operating expenses were down slightly sequentially. The aim of the realignment is to improve the efficiency of our operations by eliminating redundancies and sites and personnel resulting from recent acquisitions and expansion activities.

Actions are part of the plan include the consolidation of our three Australia sites into one, moving manufacturing from Pennsylvania to the Czech Republic and reallocation of the Japanese demonstration facility to our new Shanghai facility and selected reductions in staffing and compensation adjustments related to those activities.

As we previously announced, we expect the total charges associated with realignment to be in the range of $17 million to $18.5 million for the second half of 2014. We expect the savings to be approximately $10 million annually as we exit the fourth quarter.

The new Czech facility has been concluded on-time and within budget, with a move to the new facility largely completed. The official opening is scheduled for mid-September and will include a VIP customer event on September 6. It is a key contributor to our margin improvement goals for 2015, with increased flexibility and efficiency.

Our tax rate was 16.9% for the second quarter and we expected it will be in the range of 18% to 20% for the second half. GAAP net income for the quarter was $24.9 million and GAAP EPS was $0.59. Non-GAAP net income was $29.7 million and non-GAAP EPS was $0.70.

As you can see on Slide 10, our balance sheet remains very strong. Total cash investments in restricted cash at the end of the quarter was $510.2 million, a decrease of $38.5 million from the end of the first quarter. Cash flow provided by operating activities was $16 million. During the quarter, we spent $30.5 million to repurchase 374,000 shares paid cash dividends of $5.1 million and spent $19 million on plants and equipment principally for the new Czech facility.

For the full year, we expect capital spending to be approximately $60 million to $70 million. Cash cycle was up five days from the first quarter, but down 27 days from the second quarter, a year ago. With that, I'll turn the call over to Don for his comments.

Don Kania

Thank you, Ray and good afternoon, everyone. The Q2 was a solid quarter with record orders and a dynamic environment. Revenues and earnings were within our guidance range, despite the deferral of major industry order that we announced meeting in New York in June.

Our Science bookings rebounded from a disappointing first quarter and we built record backlog. Orders in the last 12 months exceeded $1 billion and are 10% above the trending 12 most a year ago. New product orders continue to accelerate.

Our orders and backlog are strong and a long-term outlook is positive. We are lowering our 2014 revenue growth outlook to between 5% and 7%. As we highlighted, Science orders were strong in Q2, however the longer lead times in this business combined with the Q1 weakness in material science customers booking, has moved some revenue into 2015.

Additionally, post our June Investor meeting, we have seen some delays in our largest semiconductor customers. This dynamic is evident in our industry bookings for Q2. Although, we expect orders from electronic customers to accelerate before the end of the year, it appears that some revenue will be delayed to 2015.

Our outlook reflects the timing uncertainties and our major semiconductor customers, as they work through their capacity plans for sub 20-nanometer nodes. Once resolved, we expect accelerating adoption of our newer line products. The timing uncertainties compound the normal slow seasonal pattern in Science in Q3, resulting in the Q3 revenue outlook similar to that of Q2.

Looking beyond the third quarter, we expect to deliver record fourth quarter revenue. We have the unusual situation of having significantly more backlog scheduled for revenue in Q4 and than in Q3. In summary, even with the record order rates and backlog, we have reduced our full year revenue growth range because of revenue timing in our Science Group and demand delays from our major customers in electronics.

We still expect to finish the year and the fourth quarter with record revenue. Returning to the Q2 results, Slide 11 shows orders in the second quarter at $259 million at all time record high for any quarter, that's up 9% from last year's second quarter and up 5% from the first quarter.

Almost all of the year-over-year growth was organic with minimal impact from foreign exchange and acquisitions. You can see the breakdown between groups with Science contributing 58% of the total and Industry 42%. Turning to the detail by Group on Slide 12, Science bookings of $149 million were up 14% from last year's second quarter and up 20% from the first quarter.

Total Science bookings were the second highest for any quarter, in our history. Within the Science Group, material Science customer orders were very strong, up well over 50% from the week first quarter and up over 10% from last year's second quarter.

Product orders in the last 12 months from Life Science customers are up over 80% compared with the previous 12-month period. We are building on the inflection in the business we saw in the third quarter of last year.

Our strategic thesis is planning out, we have seen accelerating acceptance from structural biology researchers that historically use XRD and other tools and are now seeing the potential of adding electron microscopy to their arsenal.

We received multiple Titan Krios orders in the quarter from Europe and the United States. In our selling Q2 segment, we are seeing double-digit growth by early adopters. We are monitoring several potential applications that could grow into significant opportunities.

In Science, the percentage of orders from new products continue to accelerate. We believe the business in on track to contribute to our long run growth and margin targets. Industry orders were up slightly for the last year second quarter, but down from the near record levels of the first quarter.

We received orders from major memory, logic and foundry customers. Although, our largest three customers made up less than a third of the semiconductor orders in the quarter. The reflection of the industry dynamic, we highlighted earlier. The bulk of the Q2 orders, were from smaller players in the semiconductor industry.

Overall, we continue to benefit from the move to smaller nodes, new materials and 3D structures. These industry trends create complexity in the process and are driving demand for greater number of TEM samples. Our near-line strategy has gained acceptance with all our major customer signing off on their first near-line installations.

In addition, we have received initial orders for path lining at 10-nanometers. We expect to see significant volume growth as the industry ramps at 14-nanometers. Focuses on yield challenges and then turns it investment to winning the competition for the 10-nanometer product generation.

In parallel, we also expect to shift our first 7-nanometer path lining tools, later this year. Increased adoption of near-line is additive to our growing semiconductor lab business, but it is likely to bring more volatility as we had exposure to specific facility plans and volume ramp.

Near-line also brings tremendous opportunity for revenue growth at high margins. A trade-off we are comfortable making. Looking at Q3, we expect orders from our semiconductor customers to be up sequentially, though at somewhat slower pace than we had recently anticipated.

Natural resource customer orders in the quarter, while relatively small, were up from last year. We continue the integration of Lithicon into our oil and gas business that includes our existing products and software offers.

As we have strategic meetings with industry leaders. We remain excited about the long-run opportunity, they see in the Digital Rock Technology. We have added several industry veterans to our sales and marketing teams and have seen an increase and coating activity for our oil and gas solutions.

Our new facility and demo center in Houston is scheduled to open in the fourth quarter. As we've said 2014 is the year of integration and we expect more significant business impact starting in 2015. Switching out to a geographic look at our second quarter orders on Slide 13. The US is up year-over-year and up significantly from Q1.

Europe was up over 20% year-over-year, but down sequentially from a very strong Q1. Asia including Japan was flat year-over-year and up sequentially. For the first time in several years, orders besides tools from US customers were significantly higher than Science orders from China.

Science orders from China were up mostly from the first quarter, but were down compared to last year's second quarter. The demand remain substantial, but it appears that government anticorruption initiative are slowing the funding and procurement process in China.

While our second quarter orders in United States were strong, the majority of the growth was driven by State and private funding sources. In aggregate, our new products were over 50% our products orders in the second quarter, with Science orders an accelerating contributor.

Customer reaction to the new products and work flows is been positive. We continue to see significant increase in our order pipeline. The impact from rotation and demand to new products that temporarily slowed material Science customer orders in Q1 appears to be decreasing as customers adjusted plans and grant applications to incorporate the new pricing and new capabilities, we have brought to market.

We will introduce more new products next week, at the Annual Microscopy and Microanalysis show in Hartford, Connecticut and at the International Microscopy Congress in Prague in early September.

Turning to Slide 14 and our guidance. For Q3, we expect revenue to be in the range of $228 million to $243 million with a book-to-bill again 1.01:1. GAAP EPS for Q3 is expected to be in the range of $0.35 to $0.45 and non-GAAP EPS is expected to be in the range to $0.60 to $0.70.

For the full year, we now expect revenue growth to be in the 5% to 7% range. While we expect the top line in Q3 to be approximately flat with Q2 and comfortable with our visibility into a strong fourth quarter that will lead us into growth for 2015.

We are expanding our served available market. We are just [indiscernible] products continue to accelerate. Life Sciences customer's orders and backlog have grown substantially as we established cryo EM as a key technology in structural biology. Orders from material science customers are back on track and the new product content is expanding rapidly.

Our market position with semiconductor customer is strong and we've seen improving market places, our near-line strategy is taking hold. We are integrating our oil and gas operations with targets for growth in 2015 and beyond. So in summary, even as we produced record orders in second quarter revenue, our third quarter revenue forecast is disappointing.

We expect a record fourth quarter and look forward to entering 2015 with an expanded served market, strong adoption of our new products, solid backlog in a more efficient company. We remain confident in our ability to grow FEI expand our margin towards our mid-2015 targets. With that, operator. We are now ready for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) and we will go first to Patrick Ho with Stifel Nicolaus

Patrick Ho – Stifel Nicolaus & Company

Don, given some of the moving pieces on the semiconductor side of things both in terms of memory and foundry. In terms of some of the delays of I guess the orders that you're expecting. Is it biased towards one or other or is it mixed with both of those ends?

Don Kania

Patrick, it's really quite mixed amongst the three major manufactures and you've got foundry, you've got memory and logic and logic and foundry, all mixed up and everybody's got to, everybody has a different story at this point in time and they're all evolving. We believe, there's light at the end of the tunnel certainly from a order perspective and for the end of the year and we thought ultimately, it was prudent for us to take the view that we took in terms of pulling down annual growth basically based on the timing of those orders and our lack of ability to revenue them in the current year.

Patrick Ho – Stifel Nicolaus & Company

Great, that's helpful and my second question, follow-up is. With your near-line SAB workflow solutions, are there different lead times just given that this is kind of more extended product line versus some of the lab offerings you have, does that have a longer lead time relative to your traditional semiconductor offerings?

Don Kania

The lead time for those products, remember in this segment. We pretty much built the forecast for these customers so, we have great relationships with them and I think, we have a very good sense about, what's going to come when, there is some volatility.

We've always commented in this space that there can be volatility on the quarter two basis. We are not necessarily seeing much more than that at this point, but nonetheless I think the way we build the tools, the way we work with the customers, I think we feel that our ability to fill them when the demand comes is good as that with it.

Patrick Ho – Stifel Nicolaus & Company

Great. Thank you very much.

Don Kania

Thanks, Patrick.

Operator

And from William Blair, we will go next to Amanda Murphy.

Amanda Murphy – William Blair & Company

Just some questions on some of the comments you made about the third quarter guidance. So you mentioned lead times in the Life Sciences business. I'm just curious is that something that, it's been throughout what sort of change relative to expectations on that specific point that will be helpful? Thanks.

Don Kania

Generally, when we get larger orders either in aggregate like we got in the UK earlier in the quarter or for the cryos there's that room prep thing that goes along with it and that causes the time from order to revenue, to be relatively extended and we had a cryos tightened booking quarter, which was great news but typically what that means is that, our ability to recognized revenue is pushed out until the customer is prepared to accept the tool.

And we certainly try to put a lot of pressure on customers to take tools and you feel like going so far, when they don't have facilities that are not ready.

Amanda Murphy – William Blair & Company

And then on the Mat Science business, it sounds like based on that, the bookings number that's come back quite nicely, but is that something. I mean just in terms of visibility and to how sustainable that is going forward. Do you feel pretty good that customers have made some progress in digesting, the new product line in that? You might, you'll continue to see some strength there going forward.

Don Kania

I think two important points there. Yes, we are confident that Material Science will be strong going forward. One, the accelerating percentage the new products in the orders and when we look to the pipeline, it continues to accelerate inflections in the pipeline are usually very strong indicators of future order were up so and we have two things, I think they indicate that.

The strengthened order should continue and perhaps the flip way, wise to say it is, I don't think we expect to see another Q1.

Amanda Murphy – William Blair & Company

Got it and then just kind of last one at a higher level. You've talked to although double-digit revenue growth number historically. I mean and you've had obviously a couple quarters of issues in various parts of the businesses.

So just thinking about that number long-term. I mean, how much comfort do you have there. I mean obviously, you've had some good bookings growth, but do you think you can kind of get everything right-sized over the long-term to hit that, low double-digit number at some point?

Don Kania

Yes, I think we can. I do like to point to the order growth, as you highlighted and that's been, just a step above 10% if you look trailing 12% and I think, we've got the right trends in the business segment that when they come into a little better environment than they are right now, we will certainly see double-digit percentage growth.

Ray Link

We should expect to see that realistically the second half versus the first half, based in our guidance and our outlook.

Amanda Murphy – William Blair & Company

Got it, okay. Thanks, guys.

Operator

Our next question comes from Derik De Bruin with Bank of America Merrill Lynch

Derik De Bruin – Bank of America Merrill Lynch

Given that your second quarter sales were bit above Rs [ph]. Just a little bit surprised on the gross margin begin down. Are you seeing any pricing pressure from your price push back from your industrial customers and I guess because you sort of walk us through sort of the mix issues and the product and just help us get that and just lead into the question of your confidence on the 2015, meant 50s target?

Ray Link

Derik on the margin, there are really a couple things that impacted Q2 versus where we hope to be. We had already guided down at our Analyst Day mostly due to the push out in the industrial space, but we also wrote off about $755,000 of excess inventory related to our moving of facilities and realignment, so that had an impact of about 0.3.

We also did take in a couple of transactions that were fairly low margin. We shipped an old tool that had a little margin. Something we had to do sooner or later, but did it in Q2 so had a little bit of drag on margins. Our service margins were down a little bit from Q1, that's why we had less time and material contracts little bit more parts cost in Q2 versus Q1 and those are the major factors coupled with a little bit of startup cost, with our acquisition of Lithicon at those cost went through COGS as well.

Derik De Bruin – Bank of America Merrill Lynch

Great, that's helpful and I guess to sort of get to that 50% number for next year. It's like, what sort of is like the minimum organic revenue growth you sort of need to deliver on that number?

Ray Link

Not really a lot, Derik. I think we need to be somewhere north a $1 billion run rate of $250 million a quarter, so that's not materially different from where we are right now and presumably will be at that level or considerably better in Q4 and it's really a function of mix, more new products are going out.

We have a few operational issues that we are still hoping to get some additional margin out and moving to the Czech facility and having that totally up and running, which by the way the move went beautifully. So we fully expect to start yielding the benefits of that in 2015.

And lastly, I have to point out that some of these restructuring activities have an impact that's why we are effectively eliminating a factory it's not a big factory, but there still are COGS associated with that, to more consolidation into fewer and more efficient factors as good times.

Derik De Bruin – Bank of America Merrill Lynch

Great, that's helpful and I guess on the industrial side. When you started talking about the order of delays or your industrial customers, your semi customers, I mean given that I'm more of a Life Sciences guy than a semi cap analyst. I guess could you, just walking through some of the dynamics, are you – are these things that are basically just because customers are shifting suppliers and retooling or is it just them to blame their capital purchases.

Are you potentially, some of these are not coming back, just tell me why dribble [ph] more in the dynamics or although where it was?

Don Kania

Sure. I think you actually said is pretty well. There is a couple of examples of where, the market has chosen at a certainly know which direction to go and then, the winners invest and losers adjust their plan and their point of attack, which involves from our perspective typically more aggressive investment in the development side and delays in the kind of capacity side overall and so as we watch that dynamic play out and we hit a point in time, where we're kind of in between nodal changes.

And so what we expect to see, I can't get two customer specific because there are people who could figure everything else from customer comments, but one customer particular had purpose the factory in a particular direction and decided repurpose that factory and now that's settled, we have a pretty clear line of sight to orders starting to flow, before year end that's all, that's probably the fairest comment, I can make at this point.

So then, bingo it's going to go to revenue and but probably not this year and that's the speed bump, we had.

Derik De Bruin – Bank of America Merrill Lynch

Okay and that's sort of the plan. So you probably, you actually answered the question sort of way, I thought. It's basically, this sort of transition your customers and what's going on. It's not like, people decided all of a sudden to change, just stop doing or stop investing. It’s a little bit people are having to retool based upon, what's going on.

So it's not like, this is not like stuff is just going away. It just delays in their tooling.

Don Kania

In fact, where I think little more confident today than we were even in June. We've got the right tool set with in the hands of the right people to drive to growth and now, these companies will then align their spend with their either short-term business outlook, that's what they just like everybody else. So that's the speed bump, we've had.

Derik De Bruin – Bank of America Merrill Lynch

Great. Thanks, that's very helpful. Thanks, Don.

Don Kania

Thank you, Derik.

Operator

Our next question comes from Isaac Ro with Goldman Sachs

Isaac Ro – Goldman Sachs

Just maybe one more if I could on the margins there. You went through the various site on this quarter and you're guiding I think about 47% for 3Q. So I'm just wondering, if that also implies a pretty good sequential snapback in 4Q and this is all of course pursuing to that 50% goal, just trying to figure out the cadence for the balance of the year?

Don Kania

I think, you're close on the numbers and clearly, I'll say little bit different way than Ray said and Ray gave you a very nice breakdown, when you're stretching to get revenue in a period and we were clear to make actually beat the guidance in terms of, when we took it down. We worked very hard to pull orders in, there's a price to be paid for doing that.

And at the same time, we are in product transitions. We've got to flush some old inventory out and we've taken that pain here in the short term and when we look out to four. You've got volume enhancements, strong new product mix, probably a stronger electronic mix, but we are not requiring at that point.

We are pretty comfortable with the margins accelerating four.

Isaac Ro – Goldman Sachs

Got it. It's helpful and then just getting back to the semi customers. You know and I decided sort of maybe rehash the last question, but just what I'm trying to understand the elements of the demand here that were kind of off this quarter. Maybe it was a cyclical in the overall, semi cap environment versus customer specific.

It really sounds like the vast majority was customer specific, is that fair?

Don Kania

We think, just wanted to be clear. You know there is lots of industry analyst who take this, take a perspective of the entire industry ebb and flow and there is probably some virtue in that. FEI takes the perspective of, we have three really big customers that represent 60%, 70% of the business and we just follow their movements and in fact, they're becoming more and more related as each of them participates in each other's space and competes for similar sets of business.

And so I didn't even know, we don't think in terms of the macro cycle. We think in terms of customers their investment and that's what we try to feedback. Obviously internally and analyze the demand profile, but in addition to try to explain it to you, without revealing any proprietary contents with those customers.

Isaac Ro – Goldman Sachs

Yes, now I understand that. Thanks so much.

Operator

And we will go next to Tycho Peterson with JP Morgan

Tycho Peterson – JP Morgan

Just looking for a little bit more color on some of the areas, where you saw improvement. You know in Science the bookings were up nicely, was that more in the cellular and tissue side or was that more structural and I think you mentioned little more biased towards the US?

Don Kania

In the Life Sciences segment, its' definitely structural very strong cryos order quarter, very strong penetration into that new classic customers. Circling back to the other questions been rallying around, the cryos content in terms of revenue will go up, as we go forward because while we start up, we've got a bunch of orders in backlog. Those are at much higher margins than that, business is been producing overall.

So that and then in the US though, it's too early to call it trend, but as we dig into both the Material Sciences and the Life Sciences orders in the US and it was really strong. You do see a content, when you peel it back off in the instances, where universities have stepped up using their internal funding and that's quite hot. Where it all comes from – I'm not – it's difficult for us to know, but it's not directly relatable to government funding.

It's in one case, we went to President's office at the University level funded the activity. Also philanthropy still plays a pretty significant component. So I think, we remained cautiously optimistic in the event. Maybe the US is going to be better going better, but let's give another data point.

And China, I think others have highlighted this is well. This anticorruption activity has really just in our opinion slowed the process, not slowed the volume. The aggregate volume, so there is a little bit, we see that dynamic very clearly in transactions and we see it very clearly also obviously because our transaction is particularly in the science space are large, they're large ticket item.

So they do have a lot of visibility, but our market position is extremely strong. We think that plays forward well and we have to respect the process that the Chinese government wants to have in place on these deals. So we will look that play forward.

Tycho Peterson – JP Morgan

Did you see any pick up, toward the end of the quarter out of China? We've heard that some other commodities in Life Sciences based there was a pickup in order toward the end of the quarter, as maybe some of the restrictions got lifted?

Don Kania

We could probably say that to all of our businesses. It'd be very difficult for us with the accountable number of transaction that we have, that really call trend plus our backend loading typically. We are not arrange able business either, we always more in revenue. So I don't think, we can pull that out of the information that we have.

Tycho Peterson – JP Morgan

And then, some of the question on the material science business. You called that rebound there, was that more on the chemical side or the metal side, what's the outlook for the rest of the year?

Don Kania

I think, that the metal side showed some nice strength for us, that we saw it was there and that was coming through again a good big systems quarter in terms of the number Titan class tools booked.

Some large deals with multiple systems in it. It feels like business is usual again, so that's kind of where we are at.

Tycho Peterson – JP Morgan

Okay then lastly, you commented on the contribution from new products. You talked about that 50% from new systems. Can you talk about how much of that is come from the sample product to mix solve and just wondering what the penetration of that is in the market and then, as we think ahead you got the international conference in Prague. You know that's it every four year. So how important is that, potentially from your new product introduction standpoint?

Don Kania

You know Expo [ph] is hard to call out. I don't think we would as a specific item, but if we talk about Science and Industry and Science growth in new products flowing in orders. It accelerated first in the electronics business because we basically had pre-sold that to the customers via the demos and test and road maps.

Science came more slowly, but it had very nice acceleration on it. We look it at the percentage of product orders and really accelerated nicely Q1, Q2 here. So we feel and it's in the right places. So given any more color and that's quite hard for us to do and then IMC [ph] as you can commented, every four years.

In order to use that show to one, reemphasize the big order introduction we did last year, with some new stuff on top. So I think we'll, our prediction is we'll be the big boy on the block here with new stuff for customers to get excited about.

It's a nice venue to show our stuff, but like I think many trade show, not a lot of transactions are going to take place there. A lot of interactions take place there and so it's a good thing, positive thing for us overall and it's in our backyard. We are really taking customers over to the new factory, do an event there for them and I think, for bringing investor along too, if they want to come.

So we want to go to Prague and Brno, you're more than welcome to show up, as is everyone else.

Tycho Peterson – JP Morgan

All right. Thanks a lot.

Operator

Our next question comes from Tom Diffley with D.A. Davidson

Tom Diffley – D.A. Davidson

Don, maybe one more question on China? So are you feeling the near-term issues there, is just kind of well that deal near-term problem. Does that change your long-term view at all, China is a market for you?

Don Kania

No change in the long-term view. I think, we are seeing many times when political decisions are made in any kinds of transactions where the money level hasn't changed, but this is a policy change. You go through a period of upset and then people get comfortable with the new policies in place that they're actually working and then it becomes.

We all have, little worry, when I do business in the new way and it will become and more businesslike as usual like in terms of transactions in China. We have also interacted with some of our well position customers and maybe enforce that view.

Tom Diffley – D.A. Davidson

And then I guess, the strength in the US. Do you view that as kind of catch up of under investment or is it kind of sign that things are just losing up in general and could start to ramp from here?

Don Kania

I think, it's a really good data point and give us another quarter to have a sense. And it still looks stronger than it has historically, if you look at the pipeline and the backlog and the forecast but, Benjamin and I were chatting and I said, is it a trend. We really do need another quarter to take a look at this to see if, it is and of course that would be relative to our expectations that we've articulated.

We'd be positive because kept the relatively muted view of what the US is going to do.

Tom Diffley – D.A. Davidson

Okay and then you saw a pretty good diversification of your electronics customers. As your – a team that's driving the business will say the second tier players at this point?

Don Kania

I think, we've always been strong with it. It's just something we haven't highlighted but usually the percentage of, we call second tier customers, the first tier customers is absolutely the reverse of what we saw, this last quarter sort of two-thirds, one-third and this way, this quarter had flipped which was part of the reason that revenue.

If we had gotten the typical mix, it would have been much more robust semiconductor booking quarter and obviously it would have impacted our revenue outlook for the year to the positive. So I think, this is all. It's more of us always been there, but we thought it was good to give you that detail, where did the orders come from? They didn't come from the big guys.

Tom Diffley – D.A. Davidson

Yes, okay and then when you look at the near-line initial grow here. Is there a certain insertion point in the SAB, that this is becoming most popular of the biggest driver in near-term basis?

Don Kania

We'll start to pick it up with 14,16 node and we're going to watch. They'll obviously watch all this play out, but there's clearly been demand for that we can articulate and understand and our senses will accelerate as you go towards 10 and it's more equivalent, it will be required.

Tom Diffley – D.A. Davidson

Okay, but at this point your trends as far as you know, this is a pure logic of foundry [indiscernible] it sounds like I guess? It's logic.

Don Kania

It's absolutely, all the above. It's really, when we take a step back. I think we showed that chart on Investor Day at the top three way for manufacturers and they're, where they are and the feature size cycle and it really seems to be driven by 18 months ago, it was driven by customers. Certain customers took the lead, today everybody is in the same game with 3D structures drive for denser circuits and really has defaulted more to which node are you at and how are you attacking that node because the central driver, the adoption of our newer line technology.

Tom Diffley – D.A. Davidson

Got it. Great thank you.

Operator

And from ABR Investment Strategy. We will go to next to JoAnne Feeney.

JoAnne Feeney – ABR Investment Strategy

Wanted to get back to the gross margin, just for one more question. In particular, in the Sciences area we have seen now a couple of quarters. Where the gross margin is running 300 basis points below where it was last year. I'm wondering if that's just you guys getting rid of some of older tools as these new tool orders build up and whether that's the right way to think about it and then tie because that perhaps is, how does the transition over to the new facility in Brno, affect the gross margin going forward, is that a headwind that will then clear by the middle of 2015, is that part of the insight here or is that something that's going to be more affecting the GAAP versus a non-GAAP gross margin?

Ray Link

I'll answer the first part initially, the Science margins are trailing last year and I think we hit the nail on the head. We are really transitioning from old products to new products. So our order TEMs and inventory are and the ones we hit on the book are finally flushing their way through the system and new products that are in backlog and have, we've been getting order and have substantially higher margin.

So it's just, you just kind of have to wait in and sort of believe that's going to happen because the data that we have internally shows that, this should happen. As far as the new facility in Brno, there really shouldn't be any headwind with that. There might be a quarter one, there's going to be some minor incremental cost, other than the cost to move.

We are going to incur about $3 million of charges in Q3. One to move from point A to point B and two to write-off the old leases that we have on the three old structures that we're currently releasing, but once we're in the building and running product through. It should be more efficient.

I really don't know whether you're going to be coming to the IMC event, but those that are coming will really see a state-of-the-art facility. It's not a high robotic facility, but it's just laid out extremely well, huge improvement from where we were, so we are really not expecting any differential from a cost standpoint.

The lease cost for that is almost the same as our three old buildings, we will have a little bit more depreciation, but that can be easily absorbed with a little bit more volume, which we expect to be on a push through because we are on the process of moving additional products to that factory.

JoAnne Feeney – ABR Investment Strategy

Okay, great that's really helpful and then back to the question of the semiconductor customers and the near-line tools, Don. I'm just wondering perhaps your conversations where you're deriving the confidence that this really is just a delayed manned and not perhaps a lack of interest in the near-line analytical tools.

They've had a look, what will give you the confidence if they want to go through and order these more in volume?

Don Kania

I think it's the most telling thing, is directing your actions with both users and management at the companies that are adopting. We've had one customer comments, one of who has the first set full tool set, had commented that they never seen result so good with so little labor in play and so from their perspective, we're getting higher throughput cost less to run it and they're getting better data and then trend that people want to have more data, where's remains unchanged.

So I think and you can certainly relate this to other people reporting the semiconductor space that, their views of capital equipment spending in Q3, which is not too dissimilar from our position. So I think, we're just in that trend right now, but I think our optimism is the stronger than it was last time, we talked with everybody which was June because people are using the equipments.

Our team did a outstanding job on building great equipment and we are working closely with each of the customers to make sure that, the tools are optimized for their particular application approach, which are not identical. The way, they're going to be used will be different, but the tool sets themselves will be identical.

JoAnne Feeney – ABR Investment Strategy

That's really helpful and then on the budget. So obviously you're selling these in the SAB. How does the budget opportunity differ between what you would sell into the lab and versus the SAB, is that a more of a challenge because you've got to sort of take money away from other systems that would go into the SAB or do you find that to be an advantage?

Don Kania

I think it's an advantage because given overall SAB spend. We're a little large FEI, relatively modest on the scale of other people that are selling and I think another trend that's been happening, is the declining use of top down sends transitioning to optical CD in some way, is that actually if you think of this and their whole metrology defect area, is actually reducing cost for those people.

So even if you took a fixed capital view for this area. There is a pretty meaningful opportunity of spend shift that you could associate without moving into that space. I wouldn't do that one-to-one, but I think overall we are small fish, in a big ocean of money, that's good and part two, is some of the things in neighborhood of where we serve and the data that we provide, there's been a technology shift towards less expensive technology and a piece of it, so we can insert ourselves into that space probably more easily, than you think.

JoAnne Feeney – ABR Investment Strategy

Okay, that makes sense. There was a news line, about today from ASML about speaking of EUV throughput. The demands of EUV going to be more challenging for the semi guys. Is that going to drive up demand for the sorts of analytical tools, you guys provide?

Don Kania

I think, I only make my comments on my beliefs and EUV product. I think the impact that will one lithography technology over another for FEI is second order. I think for us it's the challenges of the 3D and the smaller feature sizes that come with that, that's what drives demand for our product.

The litho, you know, if I remember. We are not making edge [pg] tools, so we are not going to, we'd like triple patenting versus single pat, that's not our game. Our game is you're going to need to be able to control the processes that you're running at both dimensionally and with the right ends in the right place.

And FEI is becoming indispensible to make that happen.

JoAnne Feeney – ABR Investment Strategy

Okay, great. Thanks, that's all from me.

Operator

And our next question comes from Brad Mas with Needham & Company.

Brad Mas – Needham & Company

This is Brad, filling in for Jim. Switching gears a little bit, wondering if you can talk about how the natural resource market booking in the integration of Lithicon?

Don Kania

The integration of Lithicon? You know it's going quite well. I think, for us the big touch points in the near-term are unfortunately in the cost, we did consolidated Australia and we consolidated Canberra, where the Lithicon was located. So we moved out Brisbane and Melbourne and everybody is, those that remain with the company are consolidated there.

And then the Houston offices come along really well and the ability for us to hire industry veteran to help us drive that business. I think is critical in terms of both people seeing the value and to bringing expertise more quickly into FEI, around with Lithicon plus FEI combination.

I think it bodes well, as we said this will be a 2015 activity, but we are really pleased with the interaction with the customers in this space and they really want to take up very, very hard run at Digital Rock Technology to provide real great returns for them. So still, we're going to let all this play out, everything takes time, but the integration is going well.

Ray Link

One other item is the micro CP [ph]

Don Kania

Oh! I forgot about that, yes.

Ray Link

That is currently being manufactured at the Australian National University on a contract basis. Our highly skilled Czech workers are down there now, are transitioning that product to the new factory and we should be up and running with that product, I believe in Q4.

Don Kania

Yes in Q4.

Brad Mas – Needham & Company

Great and then with respect to the guidance for the next quarter, just wondering if you can. I know you've touched on some of, but just wondering if you can go through this some of [indiscernible] takes expected the mix of revenues and subsequent impact of margin?

Ray Link

We lost you, a little bit. I think you're asking about the mix on revenue and impact on margin, did I get that correctly?

Brad Mas – Needham & Company

Yes, in Q3.

Ray Link

We don't really breakout the mix on where we think, we're going to be, it shouldn't be substantially different, our quarter-over-quarter versus Q2, which is driving us to a margin profile slightly above where we believe, where we exited Q2 at so we are guiding margin is 47%, maybe a tad better.

Volume is essentially the same, given the midpoint of the range. So it's going to be barely similar to Q2. I think the major differences we should see likely a higher gross spot the margin by a little bit, but we will also have higher OpEx because we have our two big trade shows, that drive some cost and the tax rate, we are guiding too is going to be slightly higher.

Brad Mas – Needham & Company

Great. Thanks.

Operator

And Mr. Chamberlin at this time, there are no further questions in the queue, sir. I'll turn the call back to you.

Fletcher Chamberlin

Thank you very much operator. Thank you all for your participation and your interest. Jason and I are available. Ray and Don have to run in to some employee meetings pretty quickly, but we'd be glad to set up calls later, if that's necessary. So thank you for your interest and we're going to sign off at this point.

Operator

And ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

FEI Company (NASDAQ:FEIC): Q2 EPS of $0.70 beats by $0.04. Revenue of $237M (+6.5% Y/Y) beats by $1.78M. Shares -6% AH.