HILLSBORO Jul 31, 2015 (Thomson StreetEvents) -- Edited Transcript of FEI Co earnings conference call or presentation Thursday, July 30, 2015 at 9:00:00pm GMT
TEXT version of Transcript
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Corporate Participants
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* Jason Willey
FEI Company - IR Director
* Tony Trunzo
FEI Company - EVP, CFO
* Don Kania
FEI Company - President, CEO, Director
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Conference Call Participants
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* Patrick Ho
Stifel Nicolaus - Analyst
* Amanda Murphy
William Blair & Company - Analyst
* Tycho Pererson
JPMorgan - Analyst
* Anne Edelstein
Bank of America - Analyst
* Jairam Nathan
Sidoti & Company - Analyst
* Jim Ricchiuti
Needham & Company - Analyst
* Ryan Blakert
Goldman Sachs - Analyst
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Presentation
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Operator [1]
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Greetings and welcome to the FEI second quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure no introduce your host Jason Willey. Thank you, Mr. Willey. You may begin.
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Jason Willey, FEI Company - IR Director [2]
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Thank you and good afternoon, everyone. As Amy said, I am Jason Willey, FEI's Investor Relations Director. With me today at our headquarters in Oregon are Don Kania, our President and CEO and Tony Trunzo, EVP and CFO. We have again posted slides under events and presentations in the Investor Relations portion of our website. Before we get to the presentation we would like to remind everyone this call contains forward-looking statements that include guidance for revenue and earnings-per-share for the third quarter of 2015 and full year 2015.
To the extent that we discuss expectations about future orders, revenue growth, the timing of orders and revenue, gross margin, expenses, capital spending, or our tax rate and earnings, those statements are considered forward-looking and are 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, the slides posted for this call and in FEI's most recent 10K, 10-Q and 8-K documents and other 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 FEI's Investor Relations department at 503-726-2533. The Company assumes no duty to update forward-looking statements set out in these documents or made on this call. This call is the property of FEI Company. It will be archived in the Investor Relations section of our corporate website at www.fei.com.
I will now turn the call over to Don -- I'm sorry -- to Tony to go through the financials. Don will then discuss our financial outlook. We will then be glad to take your questions.
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Tony Trunzo, FEI Company - EVP, CFO [3]
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Thank you, Jason and good afternoon, everyone. FEI delivered strong second quarter results with revenue, gross margin, operating margin, earnings, cash flow and return metrics all performing well. Quarterly revenue of $224 million was at the upper end of our expectations. Our gross margin reached 50% for the quarter and operating margin was above 20%. Net earnings rose by 50% and earnings-per-share of $0.89 were a second quarter record.
This strong profitability along with sequential improvements in working capital resulted in $66 million of cash flow from operations for the quarter equivalent to 176% quarterly net income. Year-to-date cash from operations of $89 million is double the amount from the first half of last year and equates to 136% of net income. We returned $32 million to shareholders in the form of dividends and share repurchase during the quarter. Organic revenue was flat compared with Q2 2014 and above the mid-point of guidance provided in late April.
Revenue in the second quarter was negatively impacted by $13 million due to the stronger US Dollar with most of that impact in our science segment. Our science segment posted Q2 revenue of $105 million, up 5.7% on an organic basis compared with last year as growth remained strong in North America offset by slower activity in Europe and Asia. Our science business continues to be marketed by macroeconomic uncertainty and currency volatility in emerging markets and some European countries.
Our industry segment reported revenue of $120 million, a decline of 5.2% on an organic basis from last year's record second quarter performance. The decline reflects slower activity from leading foundry and logic semiconductor customers and a smaller contribution from oil and gas customers. However, revenue contribution from regional semiconductor customers was at the highest level for any quarter over the past four years demonstrating the expanding breadth of applications for our workflows as more industry participants need to manage growing design and manufacturing complexities.
We believe the slower order and revenue activity from the larger houses is temporary and will improve over the coming quarters. Gross margin in the quarter was 50% compared with 46.4% a year-ago. The primary drivers of the increase were foreign currency movements, improved margin in our service business and a favorable mix within both our science and industry segment.
We expect gross margin in the second half to be at similar levels to that of the first half of 2015. Operating expenses for Q2 were $66 million, $13 million below last year. Operating expenses benefited from restructuring activity undertaken during 2014, the weaker Euro and Czech koruna and continued to focus on cost containment. We also saw some benefit in Q2 from lower stock compensation costs that will not recur.
Operating income was $46 million in Q2, up 50% from the second quarter of 2014. And operating margin of 20.5% was an all-time high and 750 basis points better than a year-ago. EBITDA for the quarter was $55 million an increase of 30% from last year. Our tax rate for the quarter was 17.6%. In Q3 we see the potential for discrete tax benefits arising from the recognition of previously uncertain tax positions that may substantially reduce reported tax expense for the quarter. In the event this benefit is recognized we will provide additional details when we report our Q3 results. We have not included any impact from potential discrete tax benefit in our outlook for Q3 or for the full year.
Q2 cash flow from operations were $66 million and we ended the quarter with $513 million of cash and cash investments. During the quarter we paid dividends of $10 million and repurchased 275,000 shares of our common stock at an average price of $77.97 per share. Since the end of Q2 we have repurchased an additional 95,000 shares at an average price of $82.11 bringing our total 2015 share repurchases to 504,000 shares.
At our investor day in June we announced a 20% increase in our quarterly cash dividend to $0.30 per share and increased our share repurchase authorization to a total of 2 million shares over the next two years. 1.8 million shares remain available for repurchase under that program. At current valuations we anticipate continued repurchases at a rate similar to what was done in Q2. Before passing the call on to Don I want to put our Q2 results in the context of the financial focus areas we outlined in our June investor event. Revenue growth, earnings growth, operating margin and return on equity.
While Q3 will likely show limited year-over-year organic growth our recent bookings activity reflects organic growth in many of our businesses and provides a clear path to significantly better growth in Q4 and for the year. Operating margin reached 20.5% in Q2 and we continue to see opportunities for improved operating leverage and margin expansion over time. Return on equity is trending up and we are well-positioned to deliver earnings growth at a rate above our revenue growth.
As part of our 2016 planning process we will be refining our long-term objectives for operating margin, earnings growth and return on equity and anticipate providing more specific targets when we report our Q4 results in early 2016. With that I will turn the call over to Don for his comments.
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Don Kania, FEI Company - President, CEO, Director [4]
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Thank you, Tony and good afternoon, everyone. In Q2 we delivered strong performance highlighted by our 50% gross margin, 20.5% operating margin and significant free cash flow generation. Bookings in Q2 were $252 million yielding a book-to-bill ratio of 1.12 to one. On an organic basis orders were up 1.5% compared to the second quarter of 2014. We saw a sequential pick up in science orders driven by record demand for our cryo-EM solutions for Structural Biology.
We exited Q2 with record backlogs of $541 million, up 4.8% compared with Q2 of 2014. As I will discuss later, the backlog has a high level of orders scheduled for delivery in the fourth quarter which shifts second half revenue to the end of the year. Industry orders were up 5.6% from a year-ago on an organic basis. Strong activity from memory, [fablis] and service provider customers offset weaker orders from our largest semiconductor accounts.
Orders were particularly strong from memory customers who are benefiting from the on going migration to 3D NAND along with [theran] nodal transitions. We continue to drive adoption of near-line tools by leading-edge customers in parallel with lab investment for future generation nodes. We are heavily involved in helping our customers push forward with development of leading-edge processes as seen in the recent announcement from IBM of a 7-nanometer chip. An activity in which FEI tools played an essential role.
Our workloads have become increasingly relevant to a broad set of semiconductor customers as they deal with ever more complex structures, new materials and the challenging around yield limiting defects. Orders from our oil and gas customers remained a small component of overall industry orders but improved significantly compared with Q1 of 2015. While our expectations for this business in 2015 remain modest our confidence in the long-term opportunity for Digital Rock Technology is being validated by the market.
In Q2 we made progress establishing the technical viability and economic value of our digital rock workflow with a leading national oil company in the Middle East. We won an important digital special core analysis services order, our largest service order to-date. The contracted services are for field development planning, that is identifying the placement of new wells for maximum recovery. We anticipate being able to close several additional services and equipment orders in the second half of 2015.
[Thios] bookings were down 1.7% on an organic basis compared with Q2 of 2014. Orders rebounded from a weak Q1, but the pace of activity in a number of developing and European markets continues to be impacted by the strong US Dollar and macroeconomic uncertainty. We see these challenges primarily with our globally distributed Material Science customers. Their purchases are typically most sensitive in the short-term economic -- due to the short-term economic volatility.
The US and China continue to strengthen in the period and we see encouraging signs in our pipeline for this business. We saw record Q2 Life Sciences customer orders including a record number of Titan Krios and Talos Arctica orders from Structural Biology institutions in the US, Europe and Japan. The majority of these orders are from customers who have historically used crystallography and NMR as their primary research tools and are new adopters of cryo-electron microscopy.
For example we received a large multi tool order from a Nordic government funded foundation that is setting up two state-of-the-art cryo-EM Structural Biology centers for applications including single particle analysis and cryo tomography. During Q2 we received our first Titan Krios orders specifically for pharmaceutical development. The tool will be added to the customer's existing toolset working on fundamental research for drug design and cancer biology. We expect that the use case for cryo-EM in the pharma segment is likely to remain focused early stage fundamental research for the near-term.
We see the potential of a meaningful future growth opportunity from this large customer community. North American orders were up 5.8% year-over-year driven by higher activity from our industry and science customers. Orders in Europe were down 2% year-over-year reflecting the week Euro and slower activity from Material Science customers in emerging regions. Asia declined 12% year-over-year primarily driven by weakness in the Japanese science market.
Moving to our guidance for the third quarter, we expect revenue to be in the range of $215 million to $225 million, which implies an organic revenue decline of 1% to growth of 3.5% compared with Q3 of 2014. EPS for Q3 is expected to be in the range of $0.70 to $0.80 assuming a tax rate of approximately 20%. For the full year 2015 we continue to expect organic revenue growth to be in the range of 4% to 7% compared with 2014. At prevailing exchange rates we estimate the currency will have a negative impact of approximately 5% on our reported revenue growth.
We are maintaining our full year 2015 EPS guidance range of $3.40 to $3.70. This range assumes an expected tax rate of approximately 20% for the full year and does not factor in the potential Q3 tax benefit previously mentioned. Taken together, our Q3 and annual guidance implies a record level of revenue in the fourth quarter and significant growth sequentially. This is a result of the large level of existing backlog scheduled to ship in the fourth quarter.
The current backlog coverage ratio for Q4 is significantly higher than we would normally experience two quarters out. Thus, we expect to continue the pattern of the past few years of a week Q3 followed by a strong Q4. We are confident that the backlog coverage and the order pipeline support our outlook for substantial sequential and year-over-year revenue growth in the fourth quarter.
We remain comfortable that the long-term revenue growth will be in the range of 5% to 9% range. We see signs of improvement in our oil and gas and material signs businesses, continued growth opportunities in Life Sciences and the expansion of our workflows into our semiconductor customers. These trends along with the continued growth of our service business all support our long-term outlook.
With that, operator, we are now ready for questions.
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Questions and Answers
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Operator [1]
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Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from Patrick Ho at Stifel.
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Patrick Ho, Stifel Nicolaus - Analyst [2]
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Thank you very much. Don, first on the semiconductor side of things one of your largest customers talked about push-outs for their 10 nanometer and a change in their [mors law] cadence from their historical trends. Maybe big picture for you. One, how do you see those trends potentially impacting your core semiconductor business and, two, do you see that type of cadence for your other customers as well that are also pushing towards 10 nanometers?
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Don Kania, FEI Company - President, CEO, Director [3]
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We're a little hesitant to comment on specific customers, but I will try to speak globally about the topic. I would say that we have seen that trend, which is pretty common knowledge right now with one major manufacturer deciding to slip out 10 nanometers. We expect that has been in effect on our business but we also expect that to turn probably early next year because as we commonly note the investments in our technology comes early in the acquisition process when one moves to go into ramp on a particular node.
Having said that, we clearly see in Asia very strong investments and timelines to produce 10 nanometer chips on a shorter time frame than indicated by the other customer. So I think that's probably the general limit which, of course, generally is good for us overall that an aggressive move on their part particularly with the in line opportunity for us to garner more tool placements is a good thing for FEI. So on balance we certainly built that into our outlook for the year and when we get to next year we'll certainly build it into that as well.
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Patrick Ho, Stifel Nicolaus - Analyst [4]
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Great. And, Tony for you in terms of the margin profile, looking ahead into the second half of the year looks like things are holding up pretty well even as the science mix likely increases given the order flow and the backlog you talked about. I guess aside from services in other areas what are you doing on the products front or even on the customer front to I guess hold up the margins at these levels?
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Tony Trunzo, FEI Company - EVP, CFO [5]
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Well, I think, as we indicated for the second half, gross margins will be roughly what they were in the first half which implies a little bit less than the 50 point level. That's going to be related to a mix shift largely. We'll have less currency benefit in the second half of the year, meaningfully less currency benefit. In terms of operating expenses, similarly we have had some -- we have been careful with our spending over the last few weeks -- excuse me -- over the last few months and I think we're going to continue to be careful in terms of allowing our spending to grow given the flow organic growth that we have seen.
We will have a little bit more expense in Q3 and a little bit more than that in Q4 just because of the normal sort of seasonal trends in spending and we did have a little bit of one time savings in Q2. So overall for the second half I think you're right. We're going to continue to see pretty strong margins. In terms of any specific actions we're taking we're just -- within the next couple weeks we're going to start launching our planning process for 2016 and I think we will probably have maybe a little bit more to say to the extent that we have any specific actions that we're going to take with respect to any of the items that we talked about at investor day once we have kind of gotten through that process.
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Patrick Ho, Stifel Nicolaus - Analyst [6]
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Great. Thank you very much.
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Operator [7]
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The next question is from Amanda Murphy at William Blair.
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Amanda Murphy, William Blair & Company - Analyst [8]
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Hi. Good afternoon. I just had a couple questions or follow-ups on the cryo-EM commentary that you made or Life Sciences commentary. I think last quarter you had mentioned there was an order that slipped out of the quarter. Was that the Nordic one? I was just curious. And then also just in terms of the Q4 commentary generally, can you just help us frame what the risk might be there for slippage out of Q4 into 2016?
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Don Kania, FEI Company - President, CEO, Director [9]
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Okay. So point one you're spot-on. That was the order that rolled over from one to two and we got it so that's good news.
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Amanda Murphy, William Blair & Company - Analyst [10]
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Yes.
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Don Kania, FEI Company - President, CEO, Director [11]
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And then with respect to the Q4, in many ways when we look at the backlog coverage that we stand at today looking into that quarter, you feel pretty good -- when we look at that and then the anticipated orders in the current quarter and then the, the risk usually revolves around what some amount of terms business that we always have in any quarter and the current build-up shows a relatively modest level of terms business in the quarter so we feel pretty good about the demand side.
Having said that, there's always risk we're so far out and then part -- I think part two of this whole thing is as we came to realize that we weren't able to pull some of this revenue into three, which we obviously tried to do but customers are customers and we have to respect their needs. We started building ahead on inventory and got the factories oriented towards above in Q4 which we're used to if you look back historically, but it will be larger on a percentage basis than it has been historically.
And then underneath that is we are shipping a larger percentage of high [SP] product this quarter, meaning the large Titan class units in particular, so therefore the number of units increase is not proportionate to the dollar increase which gives the factory a little more flexibility to achieve the targets.
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Tony Trunzo, FEI Company - EVP, CFO [12]
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Amanda, I just -- if I could I would just add a couple of things. The situation we're looking at did not emerge over the last couple of months. This is -- I think we talked about this a little bit on the Q2 call in terms of what the seasonal ramp was going to look like. We -- this layout of a strong Q4 and a softer Q3 it's not surprising to us. It's not a result of a large chunk of deliveries that were originally anticipated to go into Q3 moving into Q4. So in general we're not seeing an unusual amount of slippage. It's just the way the backlog lines out and the way our customers want the product delivered.
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Amanda Murphy, William Blair & Company - Analyst [13]
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Got it. That was helpful. And then just one more follow-up I guess to Patrick's earlier question and maybe for the non-semi people out there but I think some of the customers have also talked about launching additional products at some of the larger nodes and I realize that you're sort of situation situated earlier in the process, if you will, but do you get any benefit from those kind of additional products thinking about like a 14 nanometer one specifically as an example?
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Don Kania, FEI Company - President, CEO, Director [14]
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More product at 14 is a wonderful thing. More products at the larger nodes is not really very beneficial to FEI, but anything 14, 16 and smaller is in the sweet spot for FEI. So if they talk about more 24 nanometer stuff, it really doesn't impact what we do, but in the range that you discussed in smaller it's a good thing for (inaudible) our product.
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Amanda Murphy, William Blair & Company - Analyst [15]
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Okay. Thanks very much.
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Operator [16]
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The next question is from Tycho Peterson at JPMorgan.
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Tycho Pererson, JPMorgan - Analyst [17]
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Hey. Thanks, guys. Don congrats on getting the first cryo orders from pharma. Just wondering if you can talk a little bit about how you feel about investing in that channel. I know it's early.
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Don Kania, FEI Company - President, CEO, Director [18]
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What we feel about what Tycho? Sorry.
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Tycho Pererson, JPMorgan - Analyst [19]
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As a pharma business. You mentioned getting your first orders of cryo-EM from pharma. Can you maybe just talk a little bit about how you think about that channel and when you need to start to make some investments there?
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Don Kania, FEI Company - President, CEO, Director [20]
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I think -- so we see the adoption to be basically on the research side so from a direct sales perspective it's probably not too different, but I think we're going to make some investments as we did with the living labs to nucleate and accelerate the use and adoption by the research customers like we did at the NIH, which was, in retrospect, quite successful with the best results today, in fact, have been produced by that collaboration. So I think you should expect to see, one, we're reaching to those customers, in fact they are reaching to us.
The channel, because it's on our the research side is quite similar at this point so we feel comfortable with that though we may need to make more investment be available and as we do that we would add pharma familiarity. And then part two, I think you should expect to see us look to some let's call them consortium type arrangements to facilitate our learning and the pharmaceutical companies learning to really get quickly as possible to understanding those killer apps if you like that will drive a wider spread adoption as quickly as possible.
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Tycho Pererson, JPMorgan - Analyst [21]
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Okay. That's helpful. And then on the academic side you brought up kind of the notion last quarter that some of your customers, in particular in Europe, really just need to go back and top-up their budgets to account for the FX headwinds. Are you starting to see some evidence that that is happening? I am just trying to understand what you're seeing I guess on the FX dynamic from the (inaudible).
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Don Kania, FEI Company - President, CEO, Director [22]
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I would say that this segment that's a true statement and I think we have seen some of that happen in the quarter, but I also think number two, is the cryo seems to be less sensitive -- the cryos class tools and Artica are less sensitive to the foreign exchange and just because of the compelling value proposition that it brings. It's new, it's different, it provides capabilities that can't be acquired any other way. So people are -- once they get close to the budget are able to close the gaps I think pretty effectively.
Material Science is very different dynamic than that. Right now people of having to go back and get those budgets and that's actually kind of been traditionally the situation that Life Sciences seems to be able to find more quickly than the Material Science class customers that we have. But things -- we're really pleased with the order flow in particular in this quarter from both the high-end tool cryos and the Arctica so records on both is pretty fine to see.
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Tycho Pererson, JPMorgan - Analyst [23]
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Okay. And then just lastly on oil and gas on the digital core services or whatever you call that. I'm just wondering what the underlying kind of momentum in that business is? I mean are you seeing (inaudible) pick up a little bit? How do we think about whether this is a one-off or whether this is a sign of maybe some introduction in that business?
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Don Kania, FEI Company - President, CEO, Director [24]
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I think it's, I wouldn't call it inflection it's probably a little too early for that because Tony would hit me if I said that. But I think we're starting to see all the right things happen and this is -- as we have learned, this is a business that you have got to get those few adopters to build it into the run sheet so to speak and adoption will accelerate as you -- as successes with customers. I think the Middle Eastern order for services to provide support for very important economic activity which is field development, right, billions of dollars are at stake in this process is the right thing to have happening at this point in time.
So -- and we still think the Middle East or that class of national oil company is probably the best customer for that in, let's say the next few quarters. We're also seeing in parallel I hinted that we are seeing some equipment orders. We think the North American shale or shale class unconventional oil sources we're going to see some investment on the development side in that in this period as well. So it's kind of nice to see two prongs. North American field development that's going to be cold for a while. Let's just be clear that the falling oil prices haven't fully shaken through that marketplace but the Middle East and certain countries in the Middle East in particular with designs to ramp their production and do it more efficiently are fertile grounds for us to push digital rock services forward.
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Tycho Pererson, JPMorgan - Analyst [25]
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Okay. Thanks for the color.
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Operator [26]
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The next question is from Derek De Bruin at Bank of America.
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Anne Edelstein, Bank of America - Analyst [27]
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Hey, guys. It's Anne Edelstein calling in for Derek. Thanks for taking the question. So I guess maybe just hoping to dig a little bit more into the Q4 shipment scenario. Can you just provide a little bit more granularity on those orders? I mean it sounds like they're largely science, from the science side. Is that Material Science coming back or are you really seeing some sort of seismic shift in the Life Science side?
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Don Kania, FEI Company - President, CEO, Director [28]
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I wouldn't call it -- I would say we are not seeing a seismic shift. I would say the balance clearly shifts toward science in the second half, as Tony alluded to, when we looked to the margin content down a little bit flat with the first half second half but down off the 50. We're also, by way of reminder, carrying $540 million plus in backlog. I think what we're seeing here is both from the Material Science side and from the Life Sciences side, a relief of that backlog and, again, back -- there's a large tool side, the large ASP tools. Not unusual to see those come late in the year and the flipside is in Q3 a lot of that academic customer base just disappears for the summer.
So this is a natural occurrence. I think accentuated, though, by the large number of large tools which require a lot of attention on the install side. So there's no seismic shifts. We're happy with the Life Science growth. I wouldn't call it seismic. I would call it very, very positive at this point. Continuing on a good growth trend and I think on the material science piece of that business you're seeing the backlog that we have built over the past multiple quarters moving into revenue in that fourth quarter.
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Anne Edelstein, Bank of America - Analyst [29]
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Got it. Thanks. And then I guess just to stay on the seismic theme for fun. Longer term, how do you -- how will you maintain your current gross margin level as more of your revenue shifts to the science side?
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Don Kania, FEI Company - President, CEO, Director [30]
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Yes. I'll start and maybe Tony will finish. I think there's one piece of the puzzle here that we haven't mentioned. As we saw in, I think it was Q4, Q1 time frame sort of lower margins than one might have expected with our ramp to 50, you have to remember that we were flushing out the older backlog at that point in time. And we had to do that at reduced pricing because you have the new products and the old products out therel so, as we highlighted I believe in both of those periods, there was a drag on gross margin from relieving the backlog of older products, pushing that out the door.
We're largely done with that now so the revenue content of new products is quite high, which we have always highlighted as having higher margins in the period. So I think if that concern is that we kind of go back to the Q1 ish 47.4, I think part of that drag was in fact in activity that we are now largely done with. Also would like to applaud the factory groups that have done a great job with supply chain management. The new Czech facility is doing a great job for us overall. So those things that we have talked about for quite a while in terms of things that will impact margin I think are really -- have played out and we feel pretty good about the prospects for the margins as we look into the second half of the year.
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Tony Trunzo, FEI Company - EVP, CFO [31]
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Yes, Anne. It's Tony. We -- I wouldn't suggest that moving into 2016 we're going to see a shift towards science and away from industry. We obviously haven't given 2016 guidance yet and we haven't even gone through our own process for 2016, but the -- it's really a function of backlog timing that is going to lead to a heavier concentration of science in H2 of 2015. I wouldn't extend that assumption to 2016 and beyond.
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Anne Edelstein, Bank of America - Analyst [32]
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Got it. Thank you.
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Operator [33]
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The next question is from Issac Ro of Goldman Sachs.
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Ryan Blakert, Goldman Sachs - Analyst [34]
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Hi, guys. This is actually Ryan [Blakert] in for Isaac. Thanks for taking the question. On the central biology labs, can you just talk about your progress in penetrating that market and what you are seeing in terms of willingness to spend on these higher ticket items and if you had any success taking wallet share from other high ticket items like NMR?
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Don Kania, FEI Company - President, CEO, Director [35]
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So that's a difficult call to make. I think what we like to observe is that we're clearly seeing customers who have never purchased cryo-electron microscopes before find the funding to purchase a cryo-electron microscope and, in fact, along with that typically hire some people along with it to outfit the laboratory, hire the people, buy the microscope and are doing it fairly quickly. So we feel very good about that overall. So -- but we're not in a position to make any judgments about specific taking share away from the other technologies. But we have always purported that there is a pool of funding out there we're going to go get some of it. So we're making progress in that direction overall.
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Ryan Blakert, Goldman Sachs - Analyst [36]
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Okay.
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Don Kania, FEI Company - President, CEO, Director [37]
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So I think it's encouraging that there's funded people out there who have made decisions that we're providing something that's exciting new and different and allows them to do things that they couldn't do before and that are also important.
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Ryan Blakert, Goldman Sachs - Analyst [38]
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That's fair. Thank you. And just on Japan given the currency fluctuations and the weakness there do you think that's more share shift going to local competitors or is it more just funding short falls in general?
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Don Kania, FEI Company - President, CEO, Director [39]
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I think in Japan there's clearly some shift to the local folks. They have a tremendous cost advantage on us, though we did mention we sold a cryo into Japan into the last -- got an order for a cryos. We're able to sell there when we have just unsurmountable technology lead and we do do selective activities. We have always done that. It's just more difficult now. So we do walk away from deals on price there and seed if to the [incumbents] and the Hitachi. It's a good business practice for us. It's unfortunate but true that they have a tremendous cost advantage when it comes to the yen.
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Ryan Blakert, Goldman Sachs - Analyst [40]
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Thank you very much.
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Operator [41]
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Our next question is from Jairam Nathan at Sidoti.
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Jairam Nathan, Sidoti & Company - Analyst [42]
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Thanks for taking my question. Just can you update us on the headline focus here and especially given 3D NAND?
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Don Kania, FEI Company - President, CEO, Director [43]
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Oh, yes. Okay. The outfitting of the China factory for 3D NAND and the progress that's been made by both -- another customer and -- combined with a large semiconductor manufacturing company are both centered on FEI's products are front and center on the development and manufacturing of both of those products. So 3D NAND is, we think one of the very strong drivers on the memory side of growth opportunity for our semiconductor products.
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Jairam Nathan, Sidoti & Company - Analyst [44]
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And have -- I am kind of trying to understand the run-rate here, you said given that it's kind of coming -- it's related to some [plausitive] production. How long can we see or is it kind of you see it for the next six months and then as far as FEI (Inaudible).
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Don Kania, FEI Company - President, CEO, Director [45]
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It's hard for us to see and right now it's maybe even a little cloudy because my view in the semiconductor industry you sort of get a sense right now what spending might be through the end of the year. There's usually a couple of wild cards in there about people, what are you going to spend it for or one, often times people will fix -- in a capital intensive industry they can fix up their earnings by shifting some capital around and this is kind of the visibility we have right now. Looking into next year I would say other than the gross trends that we commonly talk about which is the 3D Memory is a great thing for FEI and nodal shrinks are a great thing.
Competition that we highlighted -- I think it was over a year -- at our 2014 investor day is playing out. Probably not as we would have expected it to play out whatever it was a year-ago but nonetheless the competition at 10 nanometers is a very, very positive driver for the adoption of near-line and then as we highlighted the 7-nanometer activity some new memory activities in terms of development of new products and technologies associated with those also is very good for the Company. So we're not giving any guidance on 2016 but the trend lines look good for another positive year in our semiconductor business.
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Jairam Nathan, Sidoti & Company - Analyst [46]
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Great. And just lastly, we saw at the (Inaudible) budgets going up about 10 thousand years. I know federal budget is not a big portion of your revenue, but -- of funding, but how does that impact you? And there was some initiatives and so do those -- how does that impact you?
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Don Kania, FEI Company - President, CEO, Director [47]
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Particularly in the US I think you're referring to?
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Jairam Nathan, Sidoti & Company - Analyst [48]
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Yes.
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Don Kania, FEI Company - President, CEO, Director [49]
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Yes. Let's go -- in material science I think -- let's go to the science segments, it's probably easier to talk about it. Funding does have an impact on what we do, but I think we have highlighted in the past few calls the rate of the growth particularly on the material side, be modest, in terms of government investment. But what we have found is that there has been this industrial consortium work as well as other sources of funding found to pay for the expensive equipment that we sell. So it might be the university funding things, philanthropy funding things, philanthropy being particularly powerful in the life sciences.
So what we found is to fund the growth of our business in the US. Part of it is of course the US continuing to spend the government side funding activities, but I think our customers have found quite a few different avenues to enhance those funding profiles and just allowing us for the past three-quarters to growth in North America in our science business, which is great.
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Jairam Nathan, Sidoti & Company - Analyst [50]
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Okay. Thanks. That's all.
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Operator [51]
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Our next question is from Jim Ricchiuti at Needham and Company.
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Jim Ricchiuti, Needham & Company - Analyst [52]
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Thank you. Good afternoon. Outside of the normal competitive pressures that you see in Japan has there been any change in behavior from some of your larger competitors in any of your other markets?
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Don Kania, FEI Company - President, CEO, Director [53]
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No. They still behave badly. Nothing out of the ordinary. It's always -- we have always characterized one of our competitors as it's a very price driven activity and our thesis has always been FEI just has to be better so that we can actually make margin on product and be profitable and I think we're continuing that thread. We have got some fantastic leadership products out there and some new things in the pipeline. So that's the race we're going to continue to run and I think the Company has done a good job of running that race.
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Jim Ricchiuti, Needham & Company - Analyst [54]
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Okay. And it hasn't been -- it's still -- your Analyst Day wasn't that long ago, but I was wondering if there's any update that you might be able to provide in terms of the -- your pipeline for acquisitions? Is there a bigger pipeline? How are things shaping up on that score?
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Tony Trunzo, FEI Company - EVP, CFO [55]
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I would -- Jim, it's Tony. I would say it's developing. We're trying to build some capability there. We're recruiting for somebody to lead our corporate development activities and while we're in that recruiting phase we are seeing transactions that are attractive. I can't tell you that there's anything eminent, but, for it to back up a little bit I think over the next couple of months we're going to talk in some detail about our longer term M&A strategy and specifically sort of that what's in, what's out kind of paradigm that I think I talked about a little bit at investor day.
But there are always transactions out there. Whether or not they come to pass in the short-term is going to be a little bit tough to call. I would like to see us have a little more development work with a few more lines in the water, but that's just going to take a little bit of time.
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Jim Ricchiuti, Needham & Company - Analyst [56]
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Okay. Thanks very much.
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Don Kania, FEI Company - President, CEO, Director [57]
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Operator are there any more questions?
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Operator [58]
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There are no further questions at this time. I would like to turn the floor back to management for closing comments.
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Don Kania, FEI Company - President, CEO, Director [59]
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Thank you everyone again for your interest in FEI and as always we're available for questions. Thank you. Have a good afternoon.
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Operator [60]
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This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.