Good afternoon, everyone, and welcome to Bruker's first quarter 2014 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To remove yourself from the question queue, you may press star and then two. Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Joshua Young. Sir, please go ahead.
Thank you very much, Jamie. Good afternoon. I'd like to welcome everyone to Bruker's first quarter 2014 earnings conference call. My name is Joshua Young, and I am Vice President of Investor Relations for Bruker. Joining me on today's call are Frank Laukien, our President and CEO, and Charlie Wagner, Bruker's Executive Vice President and Chief Financial Officer. In addition to the earnings release we issued earlier today, we will also be referencing a slide presentation as part of today's conference call. The PDF of this presentation can be downloaded by clicking on the earnings release hyperlink on Bruker's investor relations website. During today's call, we will be highlighting non-GAAP financial information. A reconciliation of our GAAP to our non-GAAP financial statements is included in our earnings release and in our webcast presentation. Before we begin, I'd like to reference Bruker's safe harbor statement, which I show on slide two.
During the course of this conference call, we will make forward-looking statements regarding the future events or the financial performance of the company that involve risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in our Form 10-K, as well as other subsequent SEC filings. Also note that the following information is related to current business conditions and our outlook as of today, May 7, 2014. Consistent with our prior practice, we do not intend to update our projections based on new information, future events, or other reasons prior to the release of our second quarter 2014 financial results. We will begin today's call with Frank providing a business summary of our first quarter performance.
Charlie will then cover our financials for the first quarter in more detail. Now I'd like to turn the call over to Bruker's CEO, Frank Laukien.
Thanks, Joshua. Good afternoon, and thank you for joining us on the call today. I will begin my presentation on slide four. Q1 was a reasonable start to the year for Bruker as we generated 7% organic revenue growth, drove 160 basis points of non-GAAP operating margin expansion, and reported year-over-year improvement in our free cash flow. That being said, please remember that Bruker had a relatively weak first quarter in 2013. We reported $424 million in revenue during the first quarter 2014, an 8% reported increase from the previous year. From a market perspective, we saw healthy demand from customers in the research, applied, and clinical markets during the first quarter. Our Q1 2014 revenues from industrial customers grew from a lower base after declining significantly in 2013.
While there is no strong industrial recovery, it is a positive sign that revenue from other industrial customers resumed modest growth in Q1 2014. Our microelectronics revenue, which includes semiconductor, data storage, displays, and solar, declined in revenue in Q1 2014 year-over-year, but we did see a gradual pickup in orders. Geographically, Europe generated steady revenue and bookings growth in the first quarter. While we saw good revenue performance from Japan in Q1, new orders in Japan were weak in Q1 2014. We saw improving order trends in North America, but weakness in Latin America during Q1 2014. Revenues in North America declined in Q1, which is a reflection of the weaker environment we saw in bookings in North America during 2013. From a group perspective, CALID posted low double-digit revenue growth in Q1 2014 after a relatively weak Q1 2013.
Our BioSpin and BMAT groups both generated mid-single-digit revenue growth in the quarter year-over-year. Finally, we reported $0.11 in non-GAAP EPS in the first quarter of 2014, an increase of 38% from Q1 2013. In summary, we are pleased with our start to the year. The current demand environment is slightly better than what we experienced in Q1 of 2013, and we believe we are on track to deliver our full year 2014 guidance. Now, please turn to slides five and six, where I will provide some additional details about the performance of our three BSI segment groups and our BEST segment. I will start with the Bruker BioSpin Group. BioSpin delivered another good quarter, posting good revenue growth in Asia and continued steady performance in Europe. This is our second consecutive quarter of solid revenue growth from BioSpin.
Some of this growth has come from a concerted effort on our part to work down excessive backlog. During Q1 2014, both our BioSpin magnetic resonance spectroscopy division and our preclinical imaging division performed well. Now turning to our CALID Group, whose revenue growth in the first quarter was generated by the Optics and life science and clinical mass spectrometry divisions, as both had an easier year-over-year comparison. Optics had strong performance in North America and is benefiting from recent product launches such as TANGO and LUMOS. Our life science and clinical, or LSC division, saw robust demand in Europe and continued momentum in their clinical microbiology business with our MALDI Biotyper platform. Our high-performance Q-TOF mass specs performed well, and academic and government demand was healthy in Europe and North America.
Our LSC team did an effective job of integrating CAM's commercial management organization during the first quarter of 2014. With this integration, LSC and CAM now share one commercial operations management team. Our CAM division posted a weak Q1 of 2014. In January 2014, we expanded our review of CAM's market focus and cost structures to identify the best way to drive the core CAM business towards profitability. We expect to share details of this CAM review with you on our Q2 earnings call this summer. Our detection division had an unexpected dip in revenues in Q1 of 2014 due to the timing of German export licenses, which were delayed for almost all countries due to the crisis in the Ukraine. On slide six, our Bruker Materials group, or BMAT revenues, grew in the mid-single digits in Q1 of 2014.
The research and academic markets, which are BMAT's largest customer segment, remained healthy and generated good performance, and I already commented on microelectronics and other industrial demand earlier. BMAT's three largest divisions all generated growth in Q1 2014. We were pleased with the performance of our new fluorescence microscopy business, which we acquired in September of 2013. This business put up strong performance in Q1 and is off to a great start in the Bruker portfolio, leveraging their new products and our larger commercial channel. The market for multiphoton and fast confocal fluorescence microscopy products are healthy in cell biology and neuroscience research worldwide. We saw the benefits of the restructuring actions that BMAT took in the second half of 2013 as the BMAT group's operating expenses declined significantly in the first quarter of 2014. This helped BMAT to deliver increased operating profitability compared to Q1 2013.
Finally, our Bruker Energy & Supercon Technologies, or BEST segment, continued to do a good job of balancing growth and improvements in profitability. Although it did have some unusual revenue timing benefits in Q1 of 2014. BEST reported revenue growth of 12% and a non-GAAP operating margin of 8% in the first quarter of 2014, and it more than doubled its operating income from a year ago. Most of this improvement has come from better control of operating expenses, which have declined as a result of actions we took in 2013. BEST also had a good quarter of bookings growth as it secured some large contracts for its superconducting wire business from major MRI vendors. Now, I'd like to make a few closing remarks before turning the call over to Charlie.
While Q1 was a reasonable start to the year for Bruker, we recognize that we still have a lot of work ahead of us to deliver our operational objectives for the full year 2013. Similar to 2013, we may see quarterly variability in our business. In particular, we will face a more challenging comparison in Q2 due to our relatively strong second quarter of 2013. We expect that revenues will likely be flat in Q2 on a year-over-year basis. That being said, our lower operating expenses and growth in the first quarter should put us in a position to deliver on our full year 2014 guidance, which remains unchanged. I look forward to reporting on our progress, and now I'd like to turn the call over to our CFO, Charlie Wagner.
Thanks, Frank. I will now provide some additional details on our Q1 2014 financial performance. On slide eight, I show a snapshot of our Q1 2014 non-GAAP results. Total revenues were $424 million, an increase of nearly 8% from the first quarter 2013. Higher revenues combined with lower operating expenses drove operating leverage in the P&L as non-GAAP operating margins expanded by 160 basis points and non-GAAP EPS grew approximately 38% over Q1 2013. We also generated free cash flow and increased our net cash position during the first quarter of 2014. Turning to slide nine, I show the revenue bridge for the first quarter of 2014. Reported revenue growth of 7.7% included organic revenue growth of 6.6% and a 1.1% net positive effect from acquisitions and divestitures. The acquisition impact reflects the BMAT acquisition of Prairie Technologies, a provider of fluorescence microscopy products.
Changes in foreign exchange rates had a negligible effect on revenue during the quarter as a stronger euro offset a weaker yen compared to the prior year. On slide 10, I show our Q1 2014 non-GAAP operating results in more detail. Our Q1 2014 non-GAAP gross margin of 44.2% is a decrease of 140 basis points on a year-over-year basis. Nearly all of the decrease is due to changes in foreign exchange rates and primarily the result of the weaker yen. We also saw some pressure on our gross margin this quarter due to weak CAM performance and lower pricing for some of our BMAT products in industrial markets. Our Q1 2014 operating expenses were slightly lower on a year-over-year basis as modestly higher SG&A was offset by lower R&D spending.
Overall operating expenses as a percent of revenue declined by 300 basis points in Q1 2014 compared to Q1 2013. Our non-GAAP EPS of $0.11 was $0.03 higher than Q1 2013 and reflected a tax rate of approximately 26% in Q1 2014, which is below our expectation for a full year 2014 tax rate of 29%-30%, and the difference is primarily due to the timing of tax items and mix of jurisdictional profits. On slide 11, I show a reconciliation of our GAAP to non-GAAP financial results for the first quarter. In Q1 2014, we excluded $11.5 million of operating costs from our non-GAAP results, and that number is flat compared to Q1 2013.
We incurred $2.4 million of restructuring charges in the first quarter of 2014 and still expect our restructuring charges to increase during the course of the year and total $15 million-$20 million for the full year. We have expanded the outsourcing and restructuring activities that started in 2013 as we strive for continuous improvement in our margins. In 2014, we have already completed the divestiture of the CALID Group's Leipzig, Germany machine shop in Q1 2014, and we are in the process of consolidating other life science division manufacturing within Germany. In BioSpin, we have expanded our outsourcing of non-core manufacturing, including incremental programs to outsource electronics components in France and Germany. In addition, opportunities for further rightsizing of costs are being assessed in a number of divisions, including CAM. For programs announced or to be announced in 2014, most of the run rate benefit will begin in 2015.
On slide 12, I show our balance sheet as of March 31, 2014. Our balance sheet continued to strengthen during the quarter. Inventory increased from December 31, 2013, but was flat with Q1 of 2013, including the unfavorable effect of a stronger euro. Our days of inventory outstanding improved by 30 days, totaling 233 at the end of Q1 2014, compared to 263 days in Q1 of 2013. Accounts receivable totaled $295 million at the end of Q1, and our days sales outstanding was 65 days, unchanged from Q1 2013. Our accounts payable increased by about $40 million, and days payable outstanding increased by three days compared to Q1 2013 as our cash flow benefited from the timing of payments. On slide 13, I show our Q1 2014 free cash flow performance.
We recorded free cash flow of $9 million in the first quarter of 2014, an increase of roughly $42 million from Q1 2013. Higher net income, improved working capital, and lower CapEx spending combined to drive the improvement. On a trailing 12-month basis, our CapEx spending has roughly matched our level of depreciation, and we expect this trend to continue in the near future. Now I'll turn to our financial guidance for 2014, which I show on slide 15. We're not making any changes to our full year 2014 guidance. We expect that revenue growth from all three BSI groups and from BEST will be roughly the same as the company's overall revenue growth rate.
We're making a small update to our currency assumptions as the U.S. dollar to euro rate currently stands at [1.38 to 1.39], and the yen to dollar rate is at 102 to 103, which are slightly changed from the last time we gave guidance in February. On the bottom line, we expect to generate 10%-14% year-over-year growth in non-GAAP earnings per share during 2014. This guidance continues to assume a full year 2014 non-GAAP tax rate of 29%-30%. While we do not provide specific quarterly guidance, we do expect to see quarterly variability in the year-over-year comparability of our operating results over the next few quarters. Specifically, we expect our reported revenue growth in Q2 2014 will be roughly flat with the prior year.
Due to the strong comparable quarter that we had in Q2 2013. Keep in mind that Bruker reported 8% year-over-year revenue growth in Q2 2013 after a relatively weak start to the year in Q1 2013. I'll close by saying that Bruker is off to a good start to the year. Revenue growth is in line with our expectations, and we're managing our investments and expenses to ensure that we remain on track to achieve our guidance for the full year. With that, I'd like to turn the call over to Joshua to start the Q&A session.
Thank you. Jamie, please assemble the Q&A roster.
Ladies and gentlemen, at this time, we will begin the question and answer session. To ask a question, you may press star and then one using your touchtone telephones. If you are using a speakerphone, we do ask you please pick up your handset before pressing the keys to ensure the best sound quality. To withdraw your question, you may press star and then two. Again, it is star and then one to ask a question. Our first question comes from Brandon Couillard from Jefferies. Please go ahead with your question.
Thanks. Good afternoon. Frank, with respect to the CAM division, can you quantify the revenue size of this business now and the magnitude of the operating profit drag? Under what circumstances would you consider, I suppose, exiting the business entirely?
Yeah. Hi, Brandon. I don't see a set of circumstances where we would exit the business, but I see circumstances where we are in the process, as you know, and we are in the middle of that process of analyzing what market segments and what product lines are most core to us and where we can perhaps sharpen our focus. So we do expect to give an update on CAM when we report our Q2 earnings in roughly three months from now. We have already taken further actions in Q1, combining the commercial management structure for the customer-facing functions, sales, field application, service, and so on. That is still ongoing a little bit because we started in the middle of Q1, but it is making good progress. Other than that, we had a loss in CAM last year.
We are anticipating a lower loss this year, but still a significant loss, which is why we are looking at these things. I would rather not get into CAM quarter by quarter because we do not usually break that out. We have an issue there, and we are addressing it very seriously.
I think that is helpful. One for Charlie. Could you quantify the impact of currency on the EPS line in the first quarter, and how should we think about that dynamic? Still expect it to probably be a headwind in 2Q before normalizing in the second half. Is that fair?
In the first quarter, currency would have been about $0.02-$0.03. That is the biggest quarterly impact, primarily because of the yen. First of all, Q1 is a big revenue quarter for Japan. The year-over-year delta in the yen is the greatest in Q1, assuming today's rates remain where they are. The yen started to move in March, April of last year, and so the comps on the yen get easier in Q2, Q3, Q4. The euro delta is significant, though, year-over-year, and that comp does not get easier until Q4. For the quarter, it is about $0.02-$0.03. If rates stay where they are, that impact should lessen in Q2 and Q3 and should be a lot less in Q4.
Super. Thank you.
Our next question comes from Doug Schenkel from Cowen and Company. Please go ahead with your question.
Hi, this is actually Chris on for Doug today. Thanks for taking my question. I wanted to ask about gross margin. The one metric which looked like it could have been better amidst an otherwise solid quarter was gross margin. You attributed the year-over-year weakness largely to FX, especially the yen. Is FX masking gross margin improvement? Is it possible to quantify how much of a headwind some of the programs you are taking on to improve manufacturing and the supply chain represent?
Yep, that's a good question. This is Charlie. We would say that currency had about 140, 150 basis point impact on gross margin in the quarter. It's true that absent that, it would have been a better part of the story. That said, we are disappointed. We're looking for year-over-year improvement in gross margins on an absolute basis this year. We clearly took a lot of actions last year to begin to address that. The restructuring actions last year, where they impacted operating spending, that's flowing through. We get the full benefit of that pretty much right away. Where the restructuring actions affect cost of goods, some of that flows through. It ramps over the course of the year. Particularly when you look at things like procurement savings, they ramp over the course of the year as well.
There are a lot of factors that affect gross margin, and I'd say we are a little bit disappointed with where it came out in the quarter. But one quarter doesn't make the year, and we're counting on an absolute improvement during the year and counting on seeing the benefit from the actions that we took last year and ultimately in the future, additional actions that we'll take. I agree. It's the one point we should come in a little bit better, but it's still early.
Okay. Just one more. Some of your peers have talked about delays in capital budget releases, specifically in China, related to governmental sales. Was this an impact on your business at all?
This is Frank. I think China is reasonable. China is not fantastically strong for us right now, but it's reasonable. It's growing. We're not aware of that specific effect in China. We had reasonable growth in China, but not spectacular.
Our next question is from Jon Groberg from Macquarie. Please go ahead with your question.
Thanks, Jamie. Frank, just following up on some of the end market commentary there. You mentioned that I think some of the microelectronics and industrial earlier on in your comments, that you started to see some improvement in orders. Can you maybe just expand on that a little bit more? It has been a mixed bag, particularly around areas like semiconductors still, with some folks seeing some strength and maybe earlier stage R&D node-related investments, whereas some of the CapEx stuff is still weak. Can you maybe just kind of give us a sense of what you are seeing there? I know your comps are somewhat easier as well.
Yeah. Well, the revenue comps were still strong in Q1 of last year, but the bookings last year in that area, microelectronics, semiconductor, started to be weak. Now the bookings are picking up a little bit, and we got some orders. Often these are now for larger systems that if they make it into 2014, it would be late in the year. They could also go sometimes for customer reasons into 2015. But we did see an uptick in orders and still year-over-year, we saw some microelectronics being down in revenue, because of the delay of roughly six months that we typically have in this company between orders and revenue. So, solar remains down, LED remains down, but semiconductor is recovering a little bit, and data storage is hard to read, quite honestly. But we have gotten some encouraging orders, and these are still more technology adoption orders.
These are not volume buys. So that gives you a bit of some color to my earlier comments.
Okay. If I could just follow up again a little bit more just on the margins. I guess kind of two parts to the question. One, on the gross margin, again, Charlie, if you exclude FX, and if you think about your view for the year of getting some expansion. In the quarter, I guess where are we in terms of mix in the business and how that impacted it? Where are you in terms of some of the older pricing? Is that starting to roll off yet, and you should start to see an improvement in pricing that was delivered? I guess just generally speaking, how much more control do you feel on a quarterly basis you have of some of the discretionary costs?
It looks like while gross margin maybe was still a little weak with FX, your R&D, it seems like you are able to maybe manage that a little bit. I am curious, one, I guess the impact of mix, and then two, as you see the variability there, how comfortable you are feeling with in terms of your ability to flex costs intra-quarter, if that has changed at all in the last 18 months? Thanks.
Sure. Yeah, there was nothing remarkable about mix, I would say. Nothing material. There are always a lot of little factors that affect gross margin, whether it is adjustments to inventory or other accounting adjustments, and we had some of that flow through in the quarter. I purposely do not call that out because it happens from time to time and from quarter to quarter. What I can say is that the programs that were put in place last year are going reasonably well. We have got a lot going on on the procurement and supply chain side, and I suppose it is fair to say that some of these programs do slip a little bit. They run a little bit later than we would like, but I do not think that is worth calling out that much either.
We are trying to build on last year's programs with new programs this year, to the extent that some of these programs are aimed at reducing our material cost and purchasing and the like. There is a delayed effect, a delayed benefit there because your procurement reductions first affect inventory and then ultimately flow through your cost of goods sold. Your point around control over OpEx is accurate. I think we have now shown for at least four, maybe five quarters in a row that we have a better handle on OpEx, that folks are managing to their budgets more carefully and on the margin, making adjustments to spending when they need to offset issues in other parts of the business. That is not a winning long-term strategy.
Of course, we want to have control over OpEx, but we are well aware of the fact that we are going to drive profitability improvement through a combination of control on spending and improvement in gross margin. As I said earlier, it is one quarter. This company is hard to judge in 90-day increments, and there is nothing about Q1 that has us changing our guidance for the year.
Frank continuing. Before I discuss the pricing part, the restructurings of last year, the OpEx effect, where we have not just for short-term management of results, but really more fundamentally reset the OpEx structures of some of our divisions. I think you're really seeing that now pretty nicely in Q1. That's not just going to be a Q1 effect, I believe. Whereas it is true, as Charlie just pointed out, that some of the gross margin effects of procurement and outsourcing, they tend to come in with a little bit more of a delay because when you first outsource, you don't immediately have a cost savings. That takes a little bit to settle into the new supply chain and contract manufacturing structures.
On pricing, I think in some of the areas where we continue to foster price discipline, I think we're beginning to see some of the effects on that. For instance, in our preclinical imaging division. But you do also see some price pressures, and some of that is still in our backlog. Maybe it'll ease a little bit now, particularly when the industrial or other industrial demand fell pretty steeply in the double digits last year, that some of that is still in our backlog. Again, it's too early to say whether that will ease a little bit. It typically does ease a little bit when there is a recovery, and we're seeing a modest recovery in other industrial and apparently now in microelectronics or parts of the microelectronic markets as well. Hope that addressed your question.
Yep, perfect. Thanks a million.
Our next question comes from Tycho Peterson from JP Morgan. Please go ahead with your question.
Hey, thanks. Just looking at the quarter here, you beat the original target for flat year-over-year by north of $30 million. You are guiding $12 million below consensus for the second quarter. I know you do not give quarterly guidance, but can you just talk to whether there was an element of either pull forward or spillover from the fourth quarter that impacted this quarter in terms of larger orders?
There probably, yeah. There was clearly a little bit of pull forward into Q4, so Q4 had some pull forward and perhaps also more modestly, a little bit of pull forward into Q1. That is our comments about Q2, where we will have a much stronger comparison year-over-year. I would encourage everybody to look at the first half year. The first half year, I think will be, as best as we can tell, pretty much on track with what we have predicted for the full year.
Yeah, Tycho, we were obviously a little bit cautious in the color we gave around our Q1 expectations. The company has a little bit of a history of following a strong quarter with a slow start to the next quarter. We wanted to guard against that. So the Q1 color might have been a little bit cautious. But the organization responded and got off to a healthy start. As Frank pointed out earlier, it was an easy comp. So I guess the key point is there is nothing about the Q1 outperformance that has changed our view on the full-year outlook.
On the outlook, what are you baking in for an academic recovery in the back half of the year? We certainly heard from some of your peers that expectations are picking up for a second half of the year recovery.
Well, academic really, we haven't really looked or anticipating any big differences between back half and front half. Academic has been reasonably healthy with some geographic differences, admittedly. Europe getting stronger, North America getting stronger, Japan getting weaker simply because they had the special supplementary budget last year, which for instance, still led to pretty good Japan revenue for us in Q1 of 2014, which was the end of their previous fiscal year. So there's some gives and takes in geography, but overall, academic research spending has been, it's not growing wildly, but it's healthy and we do well in those markets. The trends first half versus second half may be a little bit more again on the industrial and microelectronics side. Some of that recovery in orders will also already go into 2015 for some of the larger projects at least.
Did that address your question or should I elaborate?
Yeah. Just one clarification on CAM. You talked before about narrowing the focus and products. Have you actually started to do that? I know you're going to give an update in the second quarter, but I was just wondering if there's an impact this quarter from maybe some operational initiatives for CAM.
We've been somewhat selective in some geographies. In some geographies where we didn't feel. These are very selected. Some selected geographies where we didn't feel that we could get profitable growth. We've scaled back a little bit. We're busy this quarter. Still a little bit busy with fully getting the production going in the new outsource/Fremont concentrated factory setting. While we have exited the Dutch factory at the end of last year. Not the first quarter, you're in the new set of circumstances. Not everything is running smoothly yet, but it's improving pretty rapidly. We're also focused on the big opportunities on the commercial side and hence the commercial management consolidation that we started in early February, and that's still ongoing a little bit, but we're getting there. So a number of things are moving there.
Other than that, we're really analyzing and trying to be very thoughtful. There's obviously quite a few market segments and some technologies and products that absolutely will be core to Bruker. We're trying to make sure that we're doing a good job in nurturing those and investing in them, while overall addressing our cost structure there.
Our next question. If you would like to ask a question, please press star and then one. To withdraw yourself, you may press star and then two. Again, it is star and then one to ask a question. Our next question comes from Isaac Ro from Goldman Sachs. Please go ahead with your question.
Good afternoon, guys. Thanks. Charlie, question for you on the ERP system. I know that's been one of the major initiatives under the hood that's maybe a little less visible for us in terms of how that's going. Maybe if you could offer an update as to progress and key goals over the next, I don't know, six months or so, be helpful.
Sure thing, Isaac. Yeah, I'd like to draw a distinction between our financial system and ERP. The big project we have ongoing right now is a financial system, financial consolidation and reporting system, that will help bring together our disparate landscape of financial systems and move us to a more enterprise-level system that's going to allow us to report more efficiently and more quickly, and there's great business value in that. It doesn't get at the complexity and diversity of the underlying ERP landscape of the company. That's one where we do have a project ongoing right now to assess what our options are there and to most likely lay out what's likely to be a multi-year plan to incrementally improve our ERP landscape over time. So with the financial consolidation system, we're going to expect to go live at the end of Q3. We're going to be running.
We're doing some parallel tests of the new system in the next two months, and we'd expect to be fully live on the new system at the end of Q3.
Got it. Thanks for that color. Just to follow up on the NMR business. You obviously have, I would call, a more favorable competitive landscape to work with now. Maybe if you talk a little bit about quote activity and backlog specifically in the core of that marketplace as you enter the middle part of the year, that would also be interesting. Thank you.
Yeah. This is Frank. Isaac, it's obviously a quarter. It's difficult to read much into it. We had good bookings in the Bruker BioSpin group. We had very strong bookings at the beginning of the first quarter of last year, so we're actually down in bookings a little bit, but that's really just fluctuations, and that's even sequential fluctuations for which there's no rhyme or reason. That's just fluctuations when you deal with big-ticket items. So I think it remains quite competitive, especially in the 400 MHz, 600 MHz, 800 MH z range. We also have an additional. We have that backlog of more niche, ultra-high field systems, which we're delivering, and of course, there's some new interest coming up from time to time. But that's not really any remarkable trends there, I would say.
Beyond NMR and related to that, the preclinical MRI, of course, has been quite healthy for us. Even overall demand for other modalities other than MRI in our preclinical imaging business demands and orders and bookings have been quite strong in Q1. So we were pleased with that, and that bodes well for our preclinical imaging business that had some strength last year, but it was a little bit erratic, and there were some pockets of weakness in certain product lines in 2013. I think we're making very good progress there.
Got it. Thanks very much.
Our next question comes from Derik de Bruin from Bank of America Merrill Lynch. Please go ahead with your question.
Hi. Good afternoon.
Hey, Derik.
Charlie, if my memory serves me correct, you had a $5.7 million licensing payment from Rosatom in Q2 last year?
That's right.
Okay. Just want to make sure that we're apples to apples, everything with the numbers when we do the math. The free cash flows improved nicely. I guess, have you given the free cash flow target for the full year?
No, we've not, Derik.
Do you expect to be free cash flow positive each quarter?
I haven't given that guidance, and I don't have anything else to offer on that today.
Okay. Great. I guess my other question was already asked, so I'll get back in queue. Thanks.
Okay. Thanks, Derik.
Our next question comes from Steve Willoughby from Cleveland Research. Please go ahead with your question.
Hey, guys. Thanks for taking my call. Following up on one of Tycho's questions. Three months ago, when we were talking about the first quarter, you were thinking the revenue growth might be around flattish. Obviously came in much better than expected. I was wondering if you could maybe talk about what parts of the business or what geographies of the business came in better than what you were thinking maybe three months ago.
All right, Steve. Bruker BioSpin did well and brought in a little bit more revenue than we had expected. BEST grew a little faster than what we had expected even at the end of February. As I said, Bruker Detection was a notable dropout because in May they couldn't ship many of their products. They need export licenses and even export licenses for South Korea, which is not close to Ukraine, but we just couldn't get export licenses, so we couldn't do anything. They had to hold back revenue. Other than that, I think, yeah, Bruker Optics was-- Thank you, Charlie. Bruker Optics did better than expected, not dramatically, but better than expected, and it's a good margin business for us.
Other than that, we were pleased that, in some ways, the growth rates of the businesses, which as you know, with a more life science-oriented, CALID and BioSpin pretty good last year, and BMAT being negative, high single digits for the full year, if I recall, were getting more in line with each other. In a given quarter, they're never exactly the same, but it points towards what we had been assuming, i.e., modest, low to mid-single digit growth maybe not in all divisions, but at least in all the groups. That's been the take-home message from Q1. If that gives you a little bit more color.
It does. Thank you. Just as a follow-up, if you could maybe provide a little bit of color on how the Biotyper launch is going so far in the U.S.
Well, the FDA-cleared Biotyper launch, it's shipping, and demand is healthy. We, of course, have sold quite a few MALDI Biotypers into research use only or into state laboratories or CDC or others that did not need FDA clearance. The MALDI Biotyper business overall, and this is not just a U.S. comment, it's even a European comment. Maybe that surprised us a little bit. We have ambitious goals for it, but it exceeded those ambitious goals. Growth in Asia is picking up as well. So it's been a good first quarter for revenue and bookings for the MALDI Biotyper business. Again, one of our faster-growing product lines. There will be some more product news because we're heading into the two most important conferences of the year, which will be the ECCMID, the European conference, which starts this weekend in Barcelona.
A week later in Boston, we have the American Society for Microbiology meeting in Boston back to back. So there'll be more product, technical and product, further significant improvements to our MALDI Biotyper platform. Initially, when they come out, it's sort of the research use only improvements. Over time, of course, we try to also make those improvements available under IVD CE, and we're also in clinical trials for further U.S. FDA claim extensions. So I hope that gives you enough information presently, and then, look at some product press releases on Monday morning coming out of Barcelona for the ECCMID, with some cool additional stuff and further workflow improvements. The MALDI Biotyper platform is doing great for us.
Our next question comes from Ross Muken from ISI Group. Please go ahead with your question.
Good afternoon, guys. Frank, you called out the TANGO in the presentation. I know it's a new product that seemingly is doing quite well. How do you feel like, in general, the R&D organization is reacting to some of the structural changes going on and some of the disciplines putting in that, from a cost efficiency operations standpoint, that maybe before were not as big a focus? Do you feel like the new product momentum is still remarkably strong despite the changes, and do you think it actually might help you get some incremental momentum on projects where the ROIC is obviously quite attractive and you had a high success rate historically?
Yeah. You took a lot of my answer, but that's good. No. I really think, we did invest. We cut out a couple of R&D projects that were too speculative and long-term. We did that last year, so that's kind of old news. But everywhere else, we're really focusing and just using the PLC process and by focusing on higher ROIC and larger market opportunities to focus and to be more efficient. And our teams, more importantly, are not saying, "Hey, here's this great opportunity," or "That adjacent market that we should get into." We're doing these things. We're doing what we want to do. And our new product flow in the first quarter with Pittcon and Analytica, I guess technically that was the first week of April, has been quite strong. And the next couple of weeks, you'll see stuff happening in microbiology.
Of course, other mass spec conferences are coming up. We'll have very strong new product flow. We've had it already in the first four months, and there is more to come. So I feel really good about our improving R&D efficiency without really any appreciable reduction and perhaps. Let's say, I don't see any reduction in our ability to innovate. And if anything, it's going to be a little bit more ROIC and larger market opportunity-focused. So I feel actually really good about what we're doing in R&D, and we're being more efficient in terms of OpEx.
You can obviously see it in the organization, Frank. One last thing, just touching upon some of the restructuring and other items you highlighted earlier in the call. Do you feel like now that you're starting to narrow the focus and you're likely slimming down CAM further, and really kind of now breaking this into several key units that will be the value drivers of Bruker. Do you feel like from an organizational perspective, it's helping the execution on some of the key projects you want to get at? One of the challenges of Bruker is always you had so many great products, so many great units, but it was a little bit dispersed. Do you feel like in shrinking the focus a bit, that's helped kind of accomplish things maybe on a medium-term basis?
Well, I would answer it this way, Ross. I think the group structure with the three group presidents, I am really pleased with that. Charlie, where applicable, we are still involved, and we are still helping them guide that, and in some areas, very involved, perhaps some. I think the group presidents and their management teams in the divisions are doing really a good job in focusing. I think that was a really good move for Bruker. I think that is healthy in terms of how I can manage the company, but also in how they then manage the divisions and the projects. I think we are seeing the benefit, and we will continue to see the benefit of that larger structural move, if you like.
That was exactly what I was asking, Frank. Thanks very much.
Thank you, Ross.
Our next question comes from Tim Evans from Wells Fargo Securities. Please go ahead with your question.
Hi, Charlie. I wanted to ask you a question on the outsourcing initiatives. Is there any way you can help us understand how substantial the opportunity there is? Maybe what percentage of your COGS do you feel like could be outsourced over time? The bigger picture here is, what are the initiatives that you really want us to focus on as far as moving the needle the most?
Yeah. Listen, that's a reasonable question. The reality is we've been working hard on outsourcing programs over the last year. There were some programs that were ongoing before that. We are still in the relative early stages, I would say, of our outsourcing efforts. We're doing what you'd expect we'd do. We're starting with things that are the most obvious to us as being non-core and working those things off. Over time, you work towards things that are more core, while obviously hanging on to those things that are ultimately very core. I will tell you, though, given the diversity of the company and just given the state of our information systems, I don't have a roadmap exactly to tell you how much of our COGS or how much of our production value ultimately makes sense to outsource.
Partly because we don't have all the information, partly because that's a judgment call around what's strategic and what's not. I don't think we have enough accumulated history or experience yet at this point to make a call on that. What I will say is we're in the relatively early innings. As we build upon each of these programs, we'll be looking to do more and more going forward. I think there's additional opportunity there that we'll look to capture over the next several years.
Okay.
This is Frank. Just maybe adding a little bit. Keep in mind, there's some outsourcing projects where we, for instance, January 1st, we divested a machine shop of the CALID Group in Leipzig, Germany. So that's outsourced a minute later or the next day. There's other outsourcing programs, like in the Bruker BioSpin Group, a lot of the cabling and electronics, where you make the fundamental decision, but then until you outsource the majority of these, it's literally a 15 to 18 months program. You take that many units and subunits and outsource them. So you see that has started, that is on track, that'll be ongoing all of this year and even into next year. Then you have the next wave on top of that.
Again, I'll stay qualitative here, where we're now taking selected medium to larger volume or medium volume, maybe the ones that aren't the most configurable but have more standard configurations and where we look at dozens or 100+ systems a year. And we're doing systems outsourcing while retaining some of the key IP components and the final test and software, of course, that we only insert at the very end stage. But on the other hand, we may now go in mass spectrometry, in some other areas, in various pilot projects. We're now in certain products going from procuring, managing, putting into inventory, paying for hundreds and hundreds of parts to maybe going into a handful or into a dozen or two dozen of parts for certain systems. So those projects, many of them have been kicked off. Some of the divisions are doing pilot projects this year.
You'll see steady progress. I know you're always asking what really moves the needle. Well, that whole process, multi-year process, does move the needle. But there isn't the one action that will be totally dramatic.
Okay. That's very helpful. I just wanted to get a quick update on when you think you might be ready to talk to the street quantitatively about long-term expectations.
We haven't set a date for that yet.
Okay, thanks.
Our next question comes from Amanda Murphy from William Blair. Please go ahead with your question.
Hey, thanks. Just a question on some of the commentary you made around pricing and BMAT. Just curious if you could provide some more detail there. Also, I know that's something that you've been looking at more strategically across your organization. So curious if you can provide an update just on your thoughts around pricing more from a corporate perspective.
Amanda, this is Frank. I'll take that one. BMAT pricing, there's two elements to it. Obviously, as other industrial, especially in the other industrial markets, and this may be natural products, this may be metals, this may be recycling. Of course, that's all in the metals industry. This may be minerals and mining or cement. Those have some cyclicality, and when the cycle is down, as it was last year, there is more price pressure from our competitors. We don't need to match that, but we can't ignore it altogether, so it exerts some pricing pressure on us that tends to ease as there is a gradual recovery. The other component can be effects in some businesses, including some in the BMAT. We have stronger competitors in Japan. They obviously, within a 15-month period, have unprecedentedly changing FX work relative to the dollar.
Maybe it's 30% relative to the euro , Swiss franc. In some cases, it's 35%-40% shift. With redesign to cost, with our procurement initiatives, you can react to that, but you can't react to that in 15 months. So you do see some pricing. You see good pricing disciplines and improving work on pricing elsewhere in the corporation. But some of these things cannot react as quickly as some of the currency changes that we have experienced in the last 15 months. But it is a high priority, and we're driving, and I think all divisions are driving it within what's competitively possible.
I know you had some pricing dynamics in NMR a few quarters ago. Is that essentially out of the gross margin now?
I think, no, not entirely. Some of these ultra-high field orders, they take sometimes much more than a year to be delivered. And I would point out that the 400 MHz to 800 MHz mainstream NMR remains pretty, not super price sensitive, but it remains quite competitive. And there's also one Japanese supplier in the mix here, not only the other U.S. company. So I think it's moving in the right direction for us, but it's not that we have pricing power there in the NMR market.
Our next question comes from Peter Lawson from Mizuho Securities. Please go ahead with your question.
Frank, as you look out across the year, what worries you the most? Where could the business slow? Just thinking about where you posted organic growth this quarter and where you are guiding.
What worries me the most?
Yes.
Well, I am a little less worried than a year ago because it is not a great demand environment, but it is an improving environment. The big worries of last year were these big currency shifts. I think those will be, I predict, I could be wrong, that those will be much smaller than what they presently are. Everybody is concerned a little bit about Asia and China. Not only China itself, but rest of Asia. Not only Japan, but even more so Korea and Taiwan and Southeast Asia are selling a lot to China. So when China catches a cold, they catch more than a cold sometimes. I would say that is an area of concern. An area of lesser concern is Europe.
Not that the Mediterranean countries have a lot of money, but the rest of Europe has stabilized nicely, and Europe's commitment to R&D funding is really quite long-term and strong and not so politically vulnerable. Demand in Russia will be weaker. First quarter has been fine, but it is almost inevitable that there will be less spending, plus they are reorganizing their Academy of Science. So even without the political crisis, there would have been some slowdown. There is some currency worries in Latin America and in India. But we have really good, strong products, and that is why our demand picture has been reasonable. We are doing well overall in the research markets. As we are getting stronger in the applied markets and stronger in the clinical markets, those tend to be pretty healthy markets for us.
So I do sleep at night. And plenty to worry about. Of course, always competitive effects. Quite honestly, those can always be the biggest effects. We are also doing well competitively. Nothing singular that sticks out that I could point to. I have given you a little bit the landscape.
No, that is great. I guess on the opposite side, what gets you up in the morning, and where do you see the upside in the business?
Well, we have an innovation and transformation project that is a multi-year project, and that gets me up in the morning. Of course, serving our customers and staying very close to them. Not only because we like what they are doing, we genuinely are proud of that, and so are all of my colleagues, but also because I think being close to your customers helps you anticipate demand and develop great products for them. I am optimistic that our long-term story or medium-term story, that we can make gradual progress, particularly focused on margin and product line with reasonable growth, is working. Every quarter it is uphill, but I think we have a good team. I think we have the organization, where more and more we have better systems. I think we are on track.
Our next question comes from Bryan Brokmeier from Maxim Group. Please go ahead with your question.
Hi, thanks for taking the question. Your R&D expense is declining quite a bit, quite a few quarters recently. Could you provide some details on what efficiency improvements you have made? Are they outsourcing of certain R&D efforts or relocation of projects to lower cost areas, maybe improved collaboration across groups that have allowed you to realize the same benefits, the same R&D efforts that you have had historically?
Well, I think it is really mostly the benefit of the management process and the product life cycle process that we have adopted and are adopting more and more stringently that helps us being a little bit more selective, doing some things not all in parallel, but in sequence. Maybe pruning some projects if they do not have a good ROIC, or if they address really only tiny markets. Or with this phase gate approach, sometimes we do something for a couple of phases, but we may not go all the way and productize it. In the pharma industry, you call this letting something fail earlier, which saves you money. So I think the management process is really a better process. I had cited a couple of examples in BEST where we very deliberately stopped some long-term, perhaps interesting upside, but too speculative a project that we stopped in 2013.
Our key priorities, and the ones with a high ROIC and the sizable addressable markets, we are pursuing and we are pursuing perhaps with a little bit more focus even. But this is still an industry that does not only have really big fields, it is also a lot of smaller, more fragmented markets, and our R&D structures remain adjusted to that. So there are some products that may address smaller parts of our market where we are doing just really well competitively and bringing out nice new products. I think our track record, just in the first four months of this year, but also for many years before that, I think is really quite good. I do not see that changing. Thank you.
Good. Thanks, Frank. Charlie, you discussed the negative impact on gross margins from currency. Do you see any positive or negative impact from unexpected performances of your business groups? How might we expect that business mix to impact your margins over the course of the year?
I'm not sure I understood the question, sorry.
You talked previously about some of the business units, or I think Frank talked about some of the business units that outperformed better than expected, such as the Optics group did a little better. Did those out-performances have any impact on the gross margin in the quarter, and how might that sort of change as we move through the year?
I see. As I said earlier, mix wasn't a big part of the gross margin story for the quarter. There's nothing about the Q1 mix that changes our outlook for the year. I think the gross margin improvement is going to come from the programs that we've announced and seeing some of those benefits from outsourcing and procurement activities come through. As Frank pointed out, being selectively disciplined about pricing where it's competitively viable to do that. Again, there's no one thing or one business that I would point to as a margin driver. I think it's about consistently improving our performance across all of our businesses.
At this time, we've reached the end of today's Q&A session. I'd like to turn the conference call back over to Mr. Young for any closing remarks.
Thank you, Jamie. I'd like to thank everybody for joining us this evening. We'd like to invite you to meet with Bruker at one of the five upcoming healthcare and growth conferences we'll be attending in the second quarter. We also encourage you to visit us at our headquarters in Billerica, Massachusetts. Thank you for your attention, and have a nice day.
Ladies and gentlemen, we do thank you for attending today's conference call. It has now concluded. You may now disconnect your telephone lines.