Azenta Inc (AZTA) 2016 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Q1 fiscal year 2016 financial results conference call. (Operator Instructions.) As a reminder, this conference is being recorded Wednesday, February 3, 2016.

I would now like to turn the conference over to Lindon Robertson, Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, [Cersei], and good afternoon, everyone. We would like to welcome each of you to the first quarter financial results conference call for the Brooks fiscal year 2016. We will be covering the results of the first quarter ended on December 31, and then we will provide an outlook for the second fiscal quarter ending March 31 of this year.

A press release was issued after the close of the markets today and is available at our Investor Relations page of our website, www.brooks.com, as are the illustrated PowerPoint slides that will be used during the prepared comments during the call.

I would like to remind everyone that, during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor Statement, the Safe Harbor slide on the aforementioned PowerPoint presentation on our website, and our various filings with the SEC, including our Annual Reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today.

I would also like to note that we may make reference to a number of non-GAAP financial measures, which are used in addition to and in conjunction with the results presented in accordance with GAAP. We believe that these non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with the GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Brooks business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves.

On the call with me today is our Chief Executive Officer, Steve Schwartz. We will open with his remarks on the business environment and our first quarter highlights, then we'll provide an overview of the first quarter financial results and a summary of our financial outlook for the quarter ending March 31, which is our second quarter of the fiscal year 2016. We will then take your questions.

During our prepared remarks, we will from time to time make reference to the slides I mentioned, available to everyone on the Investor Relations page of our Brooks website.

With that, I would like to turn the call over now to our CEO, Mr. Steve Schwartz.

Thank you, Lindon. Good afternoon, everyone, and thank you for joining our call. We're pleased to have the opportunity to report the results of the first quarter of our fiscal year 2016.

We finished a slower Q1 with much optimism for the coming calendar year. Although revenue in the quarter of $120 million was down 18% from September, we had $141 million in bookings without including orders from BioStorage, which indicates some rebound in margin, gives us confidence that June will be up from there.

In semi, we began to see orders pick up for 10-nanometer pilot lines and for systems that will go into back-end and advanced packaging lines, and our outlook for life sciences is strong on the back of a healthy bookings quarter and by the addition of BioStorage technologies. We are particularly pleased with the adoption of new products that we've developed for the semiconductor and life sciences markets. We've shipped these advanced products to our most important customers, and they're getting favorable early performance report cards. These products will begin to generate revenue this year. So, all-in, we're very positive about 2016 and the chance to, once again, improve our performance year-over-year.

In semiconductor, our business was down consistent with the equipment industry and with what you have heard from other critical sub-supplier peer companies. Our semi and global services businesses were down a combined 23% quarter-over-quarter, and down approximately 7% from the December quarter one year ago.

However, when we look at a comparison against full calendar years, we are pleased to report that, in the year which was relatively flat for semiconductor equipment, our semiconductor product business grew 26% from calendar year 2014 to 2015. That result is a combination of 21% growth in our front-end semi business and 85% in our back-end business, a testament we think to our strong market position and share gains from our investments in product development and acquisitions into new growth market segments.

We forecast growth in March driven by the same products and design wins that propelled us in 2015. Processes like deposition, etch, and ALD, which utilize our vacuum automation technology, have exploded due to the numerous three-dimensional device structures that have taken over leading edge memory and logic designs. And we are in the center of this space.

Our back-end advanced packaging business remained healthy as it was essentially flat with September. Furthermore, we anticipate that March will be a record revenue quarter for us in advanced packaging applications, as the design wins we have accumulated over the past three years are now beginning to be put into manufacturing lines, like TSMC's InFO line. I remind you that, for back-end advanced packaging, we count 25 customers and 29 different tool platforms in the win column, and we are working to capture more customers and more tool types as we believe that the back end will present more opportunities for us in the coming year.

In our September quarter, we shipped a significant number of contamination control systems to support 16-nanometer foundry capacity expansion for volume production. Consequently, as we anticipated, our contamination control systems revenue was down significantly quarter-over-quarter, from more than $16 million in September to $8 million in December. However, order patterns for CCS products give us confidence that revenue will start to increase in the current quarter as we begin to ship products to outfit 10-nanometer pilot lines.

In addition, as we'd predicted, we are seeing some of the non-leading edge foundries purchase their first contamination control systems products as they move production to technologies at and below 28-nanometer. Across the board, we see that the market for our CCS products is expanding as fabs enter the zone where yields are impacted by contaminants that are introduced as part of the processing technology, and this significantly increases the number of wafer and carrier cleaning steps that are part of the semiconductor manufacturing process. With each smaller device node, more CCS tools are required to achieve the same wafer capability.

In general across our most advanced automation products, we are seeing the start of meaningful shipments to support 10-nanometer pilot production. We have eight new design wins for 10-nanometer tools that will generate revenue this year. These are incremental design wins as we do not count wins for tools that already use our products for 14- or 16-nanometer production that are being scaled for 10-nanometer. So, we believe we are positioned to again gain more market share at the 10-nanometer technology node.

I would like to make one final comment about the semiconductor business. I know that this is a time when people are dubious about China, with so much news about economic uncertainty and market volatility. I can tell you that this is not the case for us in the semiconductor business, as we continue to see strong activity from China throughout the supply chain as there is investment and encouragement inside China to rapidly build out capability.

We are very engaged in China, and we have been for many years. We count more than 50 end users and 15 OEMs as customers, and our business is growing each year. We will remain aggressive and vigilant in how we approach the growth opportunities in China, but we do remain bullish on the potential that China's aggressive stance can do for the industry.

I'll now give an update on our life sciences business. Results for the quarter were mixed, but mostly very positive. Including the one month of strong results from BioStorage, life sciences revenue came in at $21 million for the quarter, delivering 22% reported growth over the prior year. Further, the restructuring of cost reduction actions we took during fiscal 2015 delivered a gross margin improvement of 500 basis points in the core life sciences business, and it's indicative of the positive momentum that we are driving in this business.

I do want to be clear, we are not content to discuss lower levels of losses, as this business is all about profit. And I will discuss profitability objectives in a moment. Rather, the reason for some color here is to give a sense about real progress that will serve the life sciences business into the future.

I would like to give some specific highlights on the business, which include we had $30 million of bookings from our core life sciences business, and that's without including any new orders from BioStorage. More than half of the bookings was for new, large, twin bank stores, and we won six of the seven large systems deals that were awarded in the quarter with leading biopharma, scientific research, and biotechnology companies, continuing our extremely high market share.

We have all of our early adopter BioStore III cryosystems, our small ultra-cold automated bio-stores, functioning in the field, and the feedback has been extremely positive. As a result of these successful beta trials, we are ready for full commercial launch. Manufacturing is lined up, and long lead parts are on order, customer support teams are trained and in place, and we've established a go-to-market channel, and customers are being engaged. We are now taking orders.

We anticipate close to $1 million in revenue from these cryosystems in the current quarter. The first of these systems will be shipped to research institutes in four different countries, including China. As this product gains momentum, our outlook for the remainder of the fiscal year is for growth each quarter.

We are at the cusp of the most exciting time in this industry. With the addition of BioStorage Technologies, we now have the first complete offering for critical biological sample management workflow that includes sample formatting, transport and tracking, storage, and inventory management. We are also able to provide a complete suite of bio-sample handling service offerings that utilize our tools and processes that we believe are best-in-class among our competition. Not only do we have a complete cold chain solution, but we've extended the solution down to temperatures below minus 150 degrees C, which is essential for cell lines and tissue, two of the highest growth segments within sample management.

We are now positioned to provide critical capability that will enhance the value of research and drug development through the protection and improved quality of samples. We are truly unique in our portfolio of offerings and alone in the market. Our product lineup to serve the entire cold chain of condition is now complete, but let me say a few words about what that means for our business.

As we stand today, our life sciences backlog is stronger than ever. We have 75% of our 2016 revenue forecast already booked, and our visibility is clearer than at any time in our history. It will take a couple of quarters to recognize much revenue from the stores business that we just booked in the quarter, but we still anticipate life sciences revenue in the March quarter of approximately $26 million, and we will see additional quarterly revenue growth throughout the year as we begin to recognize revenue from our cryo bio-stores, new consumables and instrument offerings, expanded bio-informatics solutions, and further growth of the BioStorage services. That is, we now have a life sciences business that will be sizable, profitable, and more predictable than at any time during its development phase. And it's a business that will add stability to balance our more cyclical semiconductor business.

Specifically, we plan to cut the quarterly loss in half in March, break-even by June, and deliver a profitable quarter in September, by which time the life sciences business is expected to be approximately 20% of our revenue and a steady and regular contributor to profit each quarter thereafter. Our momentum is strong in our core, and new technologies are in great demand. 2016 is shaping up to be a transformative year for life sciences from one of product development and market penetration to one of new product technology acceptance and utilization, plus significant growth and profitability.

In terms of outlook, it feels like we're at the beginning of an upturn in the semi business. We forecast approximately 10% increase in our semi business in the March quarter as we do see shipments to build out from 10-nanometer pilot capacity, and there's additional foundry capacity being added in China. NAND memory is also a driver. This, coupled with the growth in our life sciences business, gives us confidence in the growth we are forecasting for the current quarter.

I would like to add one more general comment before I turn the call back over to Lindon. To date, our semi business has carried the load, providing enough earnings and cash to both fund the critical new products that have gained us share in semi, but also allowed us to acquire semi growth businesses, like contamination control solutions. We have reinvested the proceeds from semi to advance our new product development, and we have successfully gained share, and we are growing as a result of our aggressive investments.

Our semiconductor business has also enabled the formation of our life sciences business, including the acquisitions and product developments that are transforming this massive opportunity into a major market for our products and services. We are now in a position in 2016 to deliver on our investments.

We are bullish about the makeup of our semiconductor and life sciences segments, which are both built on our strong core technology capabilities of automation and cryogenics in controlled environments. We thank our shareholders for their patience as we've worked diligently to create this unique portfolio, and we look forward to delivering on the potential in these strong market positions.

That does conclude my prepared remarks, and I'll now turn the call back over to Lindon.

Thank you, Steve. Please refer now to the PowerPoint slides available on the Brooks website under Investor Relations tab. I will draw your attention to slide three, which is a consolidated view of our operating performance, to begin our remarks.

Top line revenue decreased 18% sequentially to $120 million, largely due to the anticipated downturn across the semi capital equipment industry, which was partially offset by one month of contributions from the BioStorage Technologies acquisition. Non-GAAP gross margin was 35%, which was down two points from the prior quarter. BioStorage will sustain and improve our average margins, going forward, but this quarter diluted our gross margins by 70 basis points. I'll say more about this business in a few minutes.

But, if you look at our results briefly without the acquisition, the gross margin is down 1.4 points sequentially, largely driven by the diminished fixed cost absorption which comes with the lower volumes in product solutions. The income tax equation helped us this quarter as we had a total benefit of $1.2 million benefit, [not an] expense. This included the R&D tax credit approved by Congress and the benefit of the jurisdictional mix of our profit and loss equation. Non-GAAP earnings per share landed at $0.02 for the quarter.

Let's turn on to page four and look at the segments. Except for closing the acquisition faster than expected, the revenue in the quarter came in as we had expected from the beginning of the quarter. The trend primarily reflects the sharp decline seen across the capital equipment market for semi, with product solutions down 26% compared to the fourth quarter, and global services down 10%. Life science systems showed growth, driven by $6.5 million of revenue from the BioStorage acquisition. Excluding the effect of this acquisition, the base business in life sciences declined $2.6 million.

Let's spend some time to go through each segment. Turning on to page five, we see the impact that the capital equipment cycle had on the product solutions segment. When you look at the markets driving this change, sales into semiconductor front-end manufacturing fell with the slowdown of investment by the fabs. Within this space, we saw the anticipated sequential drop in contamination control solutions, which was down 53% compared to the record revenue achieved in the prior quarter.

In contrast to this, sales into adjacent markets were more resilient. Sales into this space, including our solutions supporting the advanced packaging in the back end of the line, continued to increase a modest 2%. While there's no avoiding the cycle of the industry, it's these dynamics that demonstrate an increased resiliency that we have picked up with the newer and more diverse areas of the fab supported by our automation portfolio. Gross margin for this segment was down 190 basis points. We saw the effects of lower absorption, partially offset by continued improved product costs.

Let's turn on to page six to see global services. Revenue decreased 10% from the prior quarter as repair services declined. This softness was felt across all geographies, but more so in Europe and North America, while Asia was only down modestly. Lower utilization and mix impacted the gross margin in the quarter.

On to page seven, we can see the life sciences business. Total revenues for this segment grew 22% to $20.9 million from the prior period. Excluding revenue from BioStorage, life sciences revenue softened 15% compared to Q4, with the primary driver being lower revenue from the store systems. As Steve highlighted, we saw a strong bookings quarter for the base business. $30 million of bookings in this business is our second largest quarter ever, and we continue to see a strong pipeline, all of which will support an increasing trend in revenue over the next six quarters as we deliver the systems on order.

But, within this quarter, we had to deal with the lower revenue. Excluding BioStorage, revenue was $14.4 million. Gross margins improved more than five points to 33.3%. Again, that's excluding the BioStorage impact. As we outlined previously, we completed planned fixed cost reductions in September within our life sciences business. We closed our Poway, California manufacturing site at the end of September. Our manufacturing center now resides in Manchester, England, with increased support from contract manufacturers.

In comparing our fixed cost structure in this quarter to the first quarter of 2015, we reduced $2 million in the areas of manufacturing and R&D. This also was a $1.7 million reduction compared just to the fourth quarter, and was largely in the area of shared infrastructure around storage systems.

While we have made some investments for sale structure, we are still $1.2 million lighter in fixed structure on a quarterly basis than we were one year earlier. We will continue to see profit improvements as we leverage the structure with revenue growth throughout this year.

BioStorage contributed $6.5 million of revenue in the quarter. This revenue was all from the one month of December and is an unprecedented number in the life of that business. The unusual amount was driven by a larger portion of genomic services, a lower margin service offering that fluctuates month to month. In total, the BioStorage business provided approximately $200,000 of operating profit for the month. We expect it to continue to be accretive to operating profit for the periods, going forward.

In total, our life sciences segment achieved 30% adjusted gross margins. We estimate these improve steadily toward 40% by the fourth quarter, supported by continued cost improvement in the base business, as well as by the new BioStorage business.

Now, turning to page eight, we're updating the life sciences revenue objectives for the year to $115 million. This business now has four prime growth drivers, including the new acquisition, BioStorage, the strength in store systems, the consumables expansion, and the new cryogenic store system. We will see continued profit improvement through the quarters, and, as Steve indicated, we expect to have profitable contributions in the second half of the year.

Let's turn on to page nine for a broader look at the life science revenue trend. We're pleased with the opportunities in this business to build out the stable underpinnings of a recurring revenue stream. Consumables and services are not annuities, but they have a very steady repeating demand equation. The customers with our store systems enjoy the support of our infrastructure services.

In 2015, the FluidX business added to this aspect with a consistent demand level for consumables, and now, in 2016, we have added BioStorage, a very steady source of storage service revenue and growth. As we move forward, this business model becomes more sustainable around their recurring elements, and of course we continue to focus on the cost improvements of each area.

Let's turn to slide 10 to take a look at the balance sheet. Of course, the immediate observation is the acquisition, and we provided some breakouts on the right side of the page for you. We used $128 million of our cash to acquire BioStorage. This is not a business that carries inventory, but does carry accounts receivables, and you can see BioStorage was the larger driver of that line item in this quarter.

In the lower part of that same column, you can see that the property, plant, and equipment increased with the acquisition by $14 million. This is driven by proprietary software to manage customer samples, freezers and other operating equipment, and lease-hold improvements. For modeling purposes, you can assume about $6 million to $9 million of capital required annually as we grow this business.

In base operations, there are two primary drivers of the $10 million higher working capital. We pay out the year-end variable compensation in this quarter, reducing our accrued payroll, and we maintained inventory in anticipation of the rebound, but we use less accounts payable to do so. We expect some of this to come back to us favorably in the operating cash flow of second quarter.

Our DSO will change with the addition of BioStorage, reflecting on the accounts receivable. We expect our total typical DSO to be approximately 60 to 65 days once we are into a full quarter of revenue.

Page 11 shows the cash flow. Operating cash usage for the first quarter of fiscal 2015 was $12 million, with the primary driver being the changes in working capital, which we just discussed on the prior chart. Recall I also indicated we spent $128 million for the BioStorage business. $2.5 million of this payout was actually attributed to the operating cash flow as it went to escrow to retain the leadership team, while $125.5 million was attributed to the purchase price of the business.

Capital expenditures were still at a normal level for us at $2.5 million, and we continued to pay $6.8 million for dividend payments in the quarter, which, combined with the investments and operating cash, brings us to the balance of cash, cash equivalents, and marketable securities of $65 million.

So, let's summarize on slide 12. We showed $120 million of revenue for the quarter, this past quarter. This was helped again by $6.5 million of revenue from the new acquisition, which was modestly accretive to income. This provided $8 million of EBITDA and $0.02 of non-GAAP earnings per share in the quarter. I remind you that there was an income tax benefit in this first quarter of $1.2 million [not in] expense.

So, as we look into Q2, we're pleased with the strong bookings supporting rebound in the semiconductor business. The BioStorage business will provide approximately $10 million of revenue this quarter, and will again be approximately break-even at the bottom line. This brings our revenue range to $133 million to $137 million, with earnings per share on a non-GAAP basis at $0.03 to $0.05. You can see a little more pickup in the EBITDA line than in the EPS as we anticipate returning to a normal income tax rate of approximately 35% on a non-GAAP basis this quarter.

So, that completes our prepared remarks, and I will now turn the call back over to the operator to take questions from the line.

Thank you very much. (Operator instructions.) Edwin Mok, Needham & Company.

Hey, guys, thanks for taking my question, and congrats for a good quarter and result and guidance.

So, first question I have in life science. If I kind of look at the numbers, it's up around $47 million this year versus last year based on your outlook for the year. But, I think your BioStorage [cut] had a $40 million year last year. And given the growth and the strong booking you just reported, I would have thought that your life science could even do better than that. Is it just (inaudible) some? Was it some timing of revenue? I think Steve mentioned revenue recognition may be slow, and that might have an effect. Can you give us some color on that?

Yes, Edwin, appreciate that because I think it can be a little confusing. Remember that we did say it would be on a 20% growth rate, but that's for a full year basis, and the first two months of this fiscal year we did not own the business. So, we'll have it 10 months out of the year, not a full year, but it is on that 20% growth rate.

So, I think you would actually factor in somewhere in the $40 million to low $40 million number there, and then you would be -- the balance of $75 million would be what you would be seeing in the balance of the business. And we've got Dusty Tenney's feet held to the fire on this, but we expect that we're going to optimize the portfolio here and shoot to achieve and to please on this number. I don't call it conservative, but we're very optimistic about this number.

So, excluding BioStorage, you guys expect some growth within the year, then? And I think Steve talked about the cryo product, that it might take time for revenue to be recognized. Is that just timing of revenue, or qualification? Can you give us some color?

Yes. I think inside of this, if you just took the numbers I said, and let's just say it's $75 million, that compared to $68 million last year. So, that's a little more than 10% growth. And the bookings that we're putting in now are going to help build in the second half revenue as a starting point, but it'll fall some into 2017, because it takes a typical customer ordering a large system sometimes eight to 10 months. A few of them will take a system in six to eight months, but many times it's a one-year project for them. So, we start building, and as you know, we use percentage of completion, so we'll build some of that in a few months, but it'll take a little time for that to pick up.

The cryo product, the BioStore III, it's going to be a great product for us. As we said, we anticipate perhaps $1 million of revenue this coming quarter. It's going to be based on an adoption rate. So, inside here we do have some revenue factored in for that growth around that product. And more important to us I think is the whole ecosystem around it, the value chain. We see an opportunity to fill more and more value around them.

Great, that's very good color. And jumping onto the semi-cap side, I think Steve you talk about share gain, especially around etch, dep, some of these new processes, right? I wanted to kind of focus on 3D NAND, and [is there a way] you can kind of think about how much market share position you have improved, from kind of the plainer traditional NAND versus some of these new process step for 3D NAND?

Yes, Edwin. We don't look at it so much as a process as the OEMs who we serve, so we have a very high position in etch, and we have a very high position in CVD. So, when we assess the market share we have across the board, the vacuum robotics are somewhere in the range of 70%-plus market share. So, anything that drives dep or etch drives that vacuum automation. And obviously NAND is an enormous user of dep and etch.

Of course. Okay, great. We can take that offline. So, lastly, just on the CCS product, want to clarify your commentary. Are you saying that, based on the leading etch 10-nanometer investment that you expect to start in the second quarter as suggested by some of the large OEMs, are you start to see business start to pick up in [calendar] second quarter? And I think you make some comment around [non-leading edge]. Have you start to see any adoption of those products on non-leading edge?

Yes. So, Edwin, I'll do my best. The connection wasn't the most clear, but I think you asked about, first, the 10-nanometer pilot production. In prior quarters, we already shipped some automated FOUP cleaning tools to 10-nanometer pilot lines. And in the current quarter, we'll add more of those systems into those pilot lines. So, to be clear, we've installed some for 10-nanometer. We're installing more in this quarter.

And of course, we anticipate that if there's more -- if and as there's more buildout in the second half of the year, that we will ship tools for more 10-nanometer production. In the non-leading edge foundries, what we've seen now is particularly in China, as the foundries get to 28-nanometer, they too are buying the FOUP cleaning products from us. And as a matter of fact, one of the products that's particularly well suited to some of the China foundries is the M330 product that we got as a result of the Contact acquisition.

So, it was a good midline product in the portfolio that suits China particularly well. So, we have a complete range, but we are seeing the second tier foundries now become heavier users of the CCS products. We always anticipated that would be the case. It's proving out now that they're moving toward 28-nanometer.

Great. That's all I have. Thank you, appreciate it.

Patrick Ho, Stifel Nicolaus.

Thank you very much, and congratulations on the outlook.

First, in terms of the BioStorage acquisition, I know it's really early in I guess the process, but as you discuss the acquisition on customers with both ends, both your core storage systems customers as well as the BioStorage customers, where do you see kind of the growing interest of leveraging the products with one another? So, are you seeing more from the storage guys seeing the service opportunities that BioStorage offers, or are you seeing the large customer base that BioStorage has being a potential leverage for your core business?

Yes, thanks, Patrick. Actually it's a really good question. It's one of the ones we've spent a lot on diligence, if you will. But, I think it's one also for which we have a good answer.

Very often for some of the large institutions, for example, they'll have archive samples, and they'll want those to be handled with precision. They'll want them to be handled with extreme care. BioStorage Technologies has done a tremendous job with that. They also have onsite services that they're able to apply.

But, what we find is that often these institutions will have an onsite capability where they'll have high velocity, or they'll use samples quite a bit, and those need to be stored onsite nearby, because those are active samples, if you will. But, there's a point at which some get archived, and so the combination, if you will, of the tools that we provide at the customer site where Brooks has a very strong presence, and the process capability from BioStorage, that's an opportunity at the customer site. And when we look at the opportunities that exist at BioStorage for the more longer-term storage or the bulk shipments that go back and forth occasionally, the processes that BioStorage has, coupled with some of the tools from Brooks, we think will enhance that offering, as well.

So, it's onsite for higher velocity samples and remotely for more archival kinds of storage. It's a tremendous combination, and it offers an opportunity to both entities to increase the capability in both ends of that chain, if you will.

Great, that's helpful. And on the semiconductor side of things, you saw very strong growth on the advanced packages side this year, and you're probably well aware we're starting to see a larger trend specifically this year on the [Faneuil] packaging side of things. Can you kind of just give color on what provided customers with key differentiators with your products and how you'll benefit from this emerging trend that seems at least sustainable over the next couple of years?

Sure, Patrick. We have a pretty quick design capability, so we have what we call the [Jet] common platform, which is particularly well suited to some of these back-end lines. It's a common platform that the customer will recognize now across many OEM products. And what we've done is we've spent a lot of time to adapt to different configurations of wafers in the back end, so wafers that are clamped in a frame, wafers that have been thinned and are not as rigid or as flat as conventional front-end wafers.

At the same time, we have vacuum tools that go into some of the process tools that go into the back end. So, we've taken the front-end capability and we've adapted it exactly to sometimes unusual substrate configurations, but we've been able to move very quickly for some of the OEMs.

And Patrick, I think the main reason here is we started this activity three or four years ago, so we identified the back end as an opportunity, and we were willing, as the leading provider of automation, to go with some of these smaller players, knowing that the back end was going to be a potential for us to get in. And so, business that we might not have been actively pursuing several years ago we actively went after it, and we're seeing it bear fruit now as the volumes are picking up for some of these -- what would have been considered tier two players in the back end.

Great. Thank you very much.

Thanks, Patrick.

Ben Rose, Battle Road Research.

Good afternoon. I have a few questions, actually. With the discussion around the CCS business having been down as expected in this quarter, and your expectation for it picking up later on in the year, I'm a little confused as to what is driving the pickup in March, whether it's kind of a sustained follow-through in some of the back-end products that you discussed, or whether there are other front-end products that you're selling that are accounting for this sequential pickup.

Sorry, Ben, I'm going to -- this is Steve. I'll try the first part, and Lindon and I will share the answer.

On the CCS products, these are contamination control solutions, those are mostly being driven by foundries. So, from 28-nanometer down to 10-nanometer, and these are the cleaning products, mostly for the FOUP carrier cleaning products. And most of those shipments are to China and to Taiwan, and some of the 10-nanometers for pilot line production and the foundries in China, if you will, are for 28-nanometer foundry capacity.

Just to keep it in perspective on the revenue side, last quarter we shared that we had right at $17 million, and it's down 53% this quarter to about $8 million, and then we anticipate growth from here. So, this is the business that we acquired about two years ago, and when we acquired it, we spent $32 million.

So, this $8 million of revenue is actually kind of interesting. It's such a down quarter, and of course last quarter was quite large. But, even at this $8 million, if you were just -- looked at it on a run rate, it's $32 million still. We're really pleased with this business and the growth aspects and the application space that it's going into.

Okay. And Steve, with regard to your comments about China, was that more of kind of a longer-term bullishness that you have about your prospects there, or would you see China and the customers that you mentioned earlier contributing to the first half of the year?

Yes, we've had a good business in China now for 10 years, but what we see is there are more OEMs showing up in China, and they're keen to have automation and cryogenic technologies that'll be enabled in fabs very quickly. So, we were able to have very high share there, but we're really impressed by the growth opportunities that exist in China.

And what we foresee is that, as China begins to add more semiconductor manufacturing capacity in China, that we anticipate that some of the local OEMs will be encouraged or favored, if you will, to provide systems to those fabs when they're able. So, we think it's been prudent for us to engage those OEMs as we think their business has a chance to grow as the semiconductor manufacturing continues to grow rapidly in China.

Okay, thanks, and then just two quick questions on the life sciences business. Exclusive of the BioStorage Technologies contribution in this quarter, it looks like the life sciences business was down sequentially. Was that mostly due to tough year-over-year comparisons with regard to large storage systems, or are there other factors at play there?

Yes, the statement we have, we have $14.4 million, and that was down $2.6 million from the previous quarter, the fourth quarter. And it was largely weaker store systems, and it reflected -- we had fairly slow bookings really over the last four quarters. It was a slower year. We had a few bookings.

And the thing that we reflect on, one, as Steve said, in this quarter it was nice to see it come back. We've always said for the last three years that this has been a lumpy business. We saw a real vacuum of that infrastructure investment this last year. What we still are pleased about is our win rate throughout the time period from time where we launched the twin bank. It's been really high. As Steve indicated, we had a really high win rate again this quarter on the deals that came to market. And so, it'll take a little while for that revenue to turn around because it is an infrastructure build, but Ben, that's the primary reason.

Okay. And then, finally, with regard to how BioStorage fits in from a profitability standpoint, it sounds like, on an operating basis, the Company is profitable, but its gross margin structure is lower than your life science business is currently. I'm not clear on whether that's simply because of the genomics contribution in this quarter, or whether the business can help to improve gross margins in particular for life sciences over the course of the coming year.

Yes. Actually, that's a good assessment. We did have a weaker margin month. That's the operative word, [it was a] month of business, and it was the December month. So, in that December month, there's some funny things that happen as customers have budgets at the end of their calendar year. And the business saw an unprecedented level of service revenue in that month, but it had an unusual mix to this genomic services.

And so, the margins -- we've been through all the history of the Company, and through diligence and through the recent history, and it's also a very unusual margin result for the month. So, it is lower, but it's not where we anticipate the business is.

And I think the real important point for you and our investors to understand, when we acquired the business, we looked at it without the genomic services, and then we viewed it with the genomic services as a really nice customer add-on for the customer, and it brings modest incremental profit, but that's not why we bought the business, but it's a nice customer feature to have one-stop shopping for them.

So, anyway, Ben, that's it. IT brought in a little less margin on a percentage basis. It was accretive in the first month. I was pleased about that. And we're happy on the prospects going for the rest of the year.

Okay, thanks. That's very helpful.

Good.

(Operator instructions.) David Duley, Steelhead Securities.

Thanks for taking my questions. Congratulations on nice guidance and a path of recovery in the life science profitability. That's great.

First question is on the overall exposure to fan-out. In listening to you answer previous questions, it sounds like there's two areas you have, wafer handling pieces of the puzzle, and then some sort of vacuum products offerings. What are the applications that the vacuum is used for in the back-end, or at (inaudible)?

Yes, David. We won't get into the details because I also don't want to expose necessarily the customers, but they are conventional processes that are done also with the front end. So, there are edge, and there are deposition steps. So, of the 29 design wins that we have, seven are for vacuum robotics, or vacuum systems, and the remainder are for atmospheric products.

Okay. So, you have both -- for fan-out, you have both the vacuum, and then a wafer handling exposure?

We do.

Okay, great. And could you help us, just for maybe calendar 2015, give us the size of your overall back-end business so we can understand what it means when it grows?

Yes. Last year we said that the back end in the package space, that we would hit about $30 million for the year, and that was up in a range of about 60%, and that was for our fiscal year. The back-end as we finished the calendar year, actually the growth rate was -- on those fourth quarter period compared to the previous calendar year 2014, I hesitate [to say it], but it was up more than 80%. I mean, it was a really remarkable growth for that time period. And so, that?s the ballpark that we're playing in.

So, as we describe this last year, David, I recall you had some interest in this, too, and it was what we would have said, smaller at the beginning of last year. We said it'd be meaningful when we exited 2015, and here we sit with something greater than $30 million that?s grown at this pace. And we see the applications being not just relevant, but diverse in the amount of customers. As Steve emphasized, we had 25 customers in this space. So, we really love this space now.

Yes, great. And, with that in mind, and looking at your front-end product offerings, I would just think based on your commentary, that if we have a flat WFE, that you'll be growing your semiconductor businesses in calendar 2016.

The back end can drive that, yes, Dave.

Do you think you will grow? If the overall wafer fab equipment market was flat, would your front-end oriented products grow year-over-year, or [maybe] market share gains?

Again, Dave, it'll go with the def and etch. The reason we?ve outgrown pretty significantly over the past couple years is because, in a flat WFE environment, those processes are growing. So, we will continue to ride that. As long as they continue to expand share, so will we, at a faster rate than WFE.

Okay. And help me understand. You?ve talked -- there's a bunch of moving pieces in the life science business. Just so we can understand it from a 30,000-foot perspective, how exactly do you go from your current operating loss to profitability by, I think you mentioned, the June quarter or September quarter? What are the steps that you will take to achieve that?

Well, one, let?s reflect on the steps that we?ve taken. As we said, we took out a couple of million dollars of fixed cost, and the biggest part of that came between the fourth and the first quarter. And so, we had that benefit laid into the structure of our business. However, we also had some slowness in revenue.

But, you can see that in the revenue projection, as Steve shared, we expect to be around $26 million this next quarter compared to the $21 million. And we also told you, by the way, that the BioStorage business would go from $6.5 million to about $10 million. So, you can see there's growth on both sides of the business. And so, that growth we anticipate to be leverageable, and so that?s where we think we cut our loss in half in the next quarter.

If our drop-through generally is in the 40% range in some areas of the business, it could be 50% depending where the revenue materializes, and so that incremental revenue is going to come at a really nice pace for us in terms of profit contribution. There's areas that the team is really working on continued cost improvements, both on the execution of projects as well as the overall structure of the business, and I don?t want to take anything away from them on that. They still have the eye on that, and we have a little bit planned in for that. But, the bulk of this year, I think the best way to describe it is going to be leveraging the structure that we position now with the revenue growth.

So, just to summarize this, the cost cutting that you already did on the fixed cost side, and then the revenue growth that you expect in the business based on the orders you just achieved will be the two main drivers to the improved margins?

Yes.

Great. And I noticed the stock comp went up dramatically in your financial statements. What could we expect for that, going forward?

Yes, that?s a great question. So, we replaced our ? I say we replaced. I always think of it as replacing, but we issued this three-year performance-based stock grant in this quarter, and it replaced one that was three years old. And if you may recall three years ago, the Company had not performed [as well], so it had already fallen off.

So, you're basically accruing now into a full program when we displace something that was smaller. And so, that gives you growth on a quarter-to-quarter basis just based on your required accrual. We had some other adjustments that were made in true-ups et cetera, but the primary driver here was the expansion of the program.

Going forward, you would expect that this will come down a little bit. Actually I should say, in this coming quarter, we have our Board compensation. We always face that in the second quarter, and so you may see it to be approximately flat, and then after that I think you would see it trail off just a little bit on a normalized basis.

Thanks.

Yes.

Thank you, Dave, appreciate your question.

Farhan Ahmad, Credit Suisse.

Thanks for taking my question. My first question is regarding your life sciences business. You gave very good targets for the year in terms of your quarterly revenue projections. I was wondering if you could provide us with some kind of quantitative or even, like, rough idea on how much operating profits we can expect in the fiscal year?

Yes. Farhan, we're going to be shy on doing it, but here's the objective is, as we indicated, we would cut this loss in half in this next quarter, and then get to break-even in the following quarter.

So, one, that could tell you the $4 million loss this quarter should go to around $2 million or better this next quarter. So, you could anticipate a $6 million loss in the first half. And then, we said we're going to show some profit in the second half. Remains to be seen, and we're just not going to put a number on that. But, I think from that point forward, our objective and drive is to see profitable business going forward from there, and that's the message we have inside our business. That's the focus we have, and that's what we wanted to share with you today to make sure you see that objective.

I know there'll be a tremendous interest to see the power of that earnings, and I think it's going to become very clear as we get into that fourth quarter. Keep in mind that our objective for this business is to see in excess of 40% gross margins as we get into 2017, and the life science business is on track to support that.

Got it. But, I mean, if I look at your June quarter, you are basically guiding to pretty steep ramp in revenues. So, in terms of your break-even point, are you basically saying, like, if I just analyze the June quarter revenues, the break-even level for the business around $130 million, could that improve from there as you go forward?

Again, I think we're going to hold off before we describe too far into the future on this business. But, as we aggregate the business and realize the customer synergy side, that will determine a bit just how synergistic that profit equation is, but we're very optimistic on that.

Got it. And then, looking at your life sciences business, in the projections that you provided it was very interesting that you broke it out between systems and what the recurring revenue is. And what's impressive is that you have a pretty -- the bulk of the business is actually recurring.

But, what was little bit surprising in that is that, as I look at the growth projections, that recurring stream is actually growing for next few quarters pretty steadily. So, with the recurring businesses, I would have expected somewhat lower growth rates. So, if you could just talk about, like, what's the reason that the recurring business is increasing so fast for the next few quarters?

Farhan, could you just clarify what stream you're asking about specifically?

So, if I look at your ?- the slide deck that you provided on your slide number nine, in the life sciences you had broken the service and consumables, which is the recurring piece of the business. And if I look at that, that continues to grow quite steadily through the year, much faster than what it's done, like, historically. So, I just wanted to understand, like, why is there a growth projected in the recurring businesses when I would have thought, like, recurring businesses are slow growth, steady growth kind of businesses.

Yes. So, if you look at the chart, let me just point out the difference between Q1 and Q2, because in Q1, just as a reminder, we only had one month of the BioStorage. So, you are getting a step-up in the services business around the storage, outsourced storage.

And so, from there I think, if you look from Q2 forward, what you're seeing is a little more growth, or balanced growth on both sides, really. You're getting the growth in the tail end of the year from the twin banks on the top part of the chart, and on the bottom part you're getting continued growth from both the bookings that supports, as we said, 20% growth in BioStorage, as well as we're still expanding the consumables with FluidX in the investment stream.

So, when we say that that's a steady business, we think it's a steady business that's repeatable with growth. And each time we add a customer, that's a very sticky retention on that base part of the business. That's what we like about that.

Got it. And then, one quick clarification on the CCS revenues. Obviously the revenues are pretty lumpy, like September quarter they were $17 million, down to about $8 million in the December quarter, and you talk about growth in the March quarter. I just wanted to understand how much of the growth in the products business is coming from CCS versus your other products. And is the CCS business going back to the September level, or it's somewhere in between your December and September?

Hi, Farhan. So, the CCS business is growing. It's between September and December. The advanced packaging back end is also growing. And so, all of the areas are contributing. The front end is growing, as well.

Got it. Thank you. That's all I have.

Okay, thanks, Farhan.

Mr. Robertson, there are no further questions at this time. I'll turn the call back to you.

All right. Thank you, Cersei, and thank you, everyone, for your interest and your time with us today at Brooks Automation. We really look forward to speaking with you when we report the results from our fiscal 2016 second quarter. Thank you again.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line.