Azenta Inc (AZTA) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Q1 FY17 financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, February 1, 2017. I will now turn the conference over to Lindon Robertson, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, George. Good afternoon, everyone. We'd like to welcome each of you to the first quarter financial results conference call for the Brooks FY17. We will be covering the results of the first fiscal quarter, ending December 31, and then we will provide an outlook for our second fiscal quarter, which will end March 31 of this year. A press release was issued after the market closed this afternoon and is available at our Investor Relations page of our website www.brooks.com, as are the illustrated PowerPoint slides that we will use 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 Securities Litigation Reform Act of 1995. There are many factors that may cause actual financial results 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, 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 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, and then we will provide an overview of the first quarter financial results and a summary of our financial outlook for the second quarter ended March 31. We will then take your questions at the end of those comments.

During our prepared remarks, again, 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 are pleased to have the opportunity to report the results of the first quarter of our FY17. After a strong finish in September to close out FY16, we are off to a fast start in 2017.

We completed a very successful first quarter with revenue of $160 million and earnings per share of $0.25. Bookings came in at $187 million and we have good support to our positive outlook as we move into Q2 and Q3. Our Semiconductor position continued to strengthen as measured by gross margin improvements, market share gains, and increased profitability. In Life Sciences, we delivered a sixth consecutive quarter of sequential growth and we added to our already impressive list of customers.

As planned, our product portfolio initiatives are delivering more opportunities which we expect to drive profitability. Today we will provide a summary of the results from our December quarter and give some color as to our expectations for the March quarter.

I will begin with a recap of our Life Sciences business performance. Once again, the Life Science business performed as we had expected, and then some.

Reported revenue for the quarter increased 5% sequentially from September to more than $33 million and again delivered positive operating income. Most significantly, bookings came in at a very healthy $64 million, and the mix of business was balanced across the offerings. This is a testament to the investments we have made in a strong and complete sample management portfolio, and in building a very capable global sales team. Here are some highlights from the quarter.

Helped in large part by our acquisition of BioStorage Technologies, revenue was up 60% compared to the same quarter one year ago. On an organic basis, revenue was still up 27% from December 2015. We booked $16 million in large automated stores and we now have more than 20 different stores projects on the books. These orders, plus our stores backlog, support a good year of growth for stores.

$32 million of the bookings was for BioStorage services business. We shipped the first two units of our large-capacity cryo systems to companies who are in the business of cell therapies, which is a sweet spot for our automated ultra-cold cryo systems. This market will still take time to build, but we're seeing the kind of activity that reinforces our confidence in this market.

In our consumables and instruments business, we believe we are on the right track. Even though revenue was down approximately $1 million from September, new orders in the quarter increased at a level that we have not seen for two years, and we are confident that the reorganizing of our go to market approach has begun to take hold. As we've said, revenue growth from the consumables and instrument business, along with our new cryo stores, will determine how much above 40% growth we will achieve this year.

Our Q1 performance in both sub-segments was a step in the right direction. It's now a footrace from here out, and we have a lot of work and opportunity in front of us. We added another 25 new customers in the quarter, consistent with our pace over the past year. The new customers span pharma, biotech, health sciences, government, and academic customers.

We completed the acquisition of Cool Lab Products from BioCision. We know these products well as we have been an investor in BioCision for the last three years, and jointly with BioCision, we developed of the CryoPod Carrier. The business is still small, but was immediately accretive even in our first month of ownership. It's a great fit for the portfolio of cold chain solutions and we are pleased to have these products in our lineup.

Finally, our operating profit rounded to $1 million, and that's an improvement of more than [$4 million] from the same quarter last year. I would like to take a moment to give some specifics about the $64 million in orders and explain how this is exactly the type of business we've come to expect. First, the makeup of the orders is consistent with our current business, with 70% of the orders from recurring revenue. As I mentioned a moment ago, 25% was for large store systems, a reflection of our strong market position, and also a testament to how this market segment continues to grow.

Generally, we are seeing larger individual orders than we did before we acquired BioStorage. This is in large part due to the fact that we are now a full-service provider for all things sample management and we are able to offer more value in a sample management solution than from a collection of components. To illustrate this, in the quarter, we had seven contracts of more than $2 million, and three which were each greater than $5 million.

Increasingly, we are seeing contracts include multiple offerings; that is, bundled value from capabilities that we have brought together. We are pleased by the market reception we have received to date, and we anticipate more and larger opportunities in the future.

All in, 2016 was a year of incredible maturation for the Life Science business. To put the accomplishment in proper perspective, it's instructive to compare the dramatic improvement from calendar 2015 to calendar 2016. In 2015, revenue was $72 million with operating loss of $17 million. In 2016, revenue was $121 million, and delivered break-even operating profit for the year, a positive income swing of $17 million. Like any business start-up, we are going to have many puts and takes as we develop the business, but we are in this business to drive growth and create tremendous shareholder value.

We will remain balanced and focused on taking the proper long-term actions to support the growth objectives of a great business. That said, by all measures we plan to deliver outstanding results this year. The next steps you will see include a sequential revenue increase in March of another 5% to 10%, and a target to be above $40 million by the June quarter. We also plan to deliver an increase in profit each quarter this year. And as one final note, we continue to actively evaluate our pipeline of acquisition opportunities that we believe can help us to accelerate growth and profitability.

I will now turn to the Semiconductor business. As you are well aware, the semiconductor capital equipment market is quite strong, and based on inputs from our customers, we are positive about the business going into the March and June quarters, which I'll speak about in a moment.

In the December quarter, our BSSG business was up 27% compared to one year ago. When we remove the license and YBA distribution agreement revenue, we were up 38% in the businesses we still participate in today. These are robust times, indeed.

Although the total market wafer fab equipment market opportunity has seemed rather stable over the past five years, those of us who are deep inside know there have been a lot of big movements under the surface. At Brooks, we have had success by purposefully targeting product investments around important high-growth sectors. But it's worth noting that we have semiconductor business from sectors which have not been growing. Specifically, our cryopump franchise has extremely high market share and volume from two key semiconductor tool platforms, ion implantation and PVD.

In calendar 2016, ion implant, a high content tool that uses cryopumps and vacuum robots, was down 20% from 2015, quite unusual in an up WFE market. And PVD business, though not down as much, was also smaller in 2016 compared to 2015. The reason I mention this is not to make an excuse, as we will never be apologetic about high market share in profitable business segments, but rather to explain that while 3D NAND memory capacity has driven tremendous growth for parts of wafer fab equipment, it has not necessarily impacted all parts of the equipment supply chain. That said, we do forecast our business for both ion implant and PVD to grow in the current quarter.

But now I would like to talk about our high growth sectors. As we've highlighted for several quarters, we have targeted three specific growth areas in the semiconductor business where we have been able to take advantage of trends that are changing the way semiconductors are made. Specifically, vacuum automation is being accelerated because of the increased demand for deposition and etch.

Our Contamination Control solutions are key to device yield at sub-28nm process technologies, and Advanced Packaging that is driven by the pervasive expansion in the number of mobile and connected devices has expanded our front end semi solutions into the back end. The implications of all three of these trends has been and will continue to be meaningful for Brooks.

Specifically, our vacuum automation product revenues increased 15% quarter-over-quarter and 17% for the full calendar year 2016 over 2015. As the large OEMs are setting records for shipments into the deposition and etch technology segments, so, naturally, are we. Furthermore, we see another increase in the March quarter as the equipment ramp continues, and we will set another record for vacuum robots with our production forecast up more than 30% in the quarter, a very aggressive ramp, indeed.

While the largest OEMs are bellwethers for the growth in deposition and etch, our vacuum automation continues to outgrow the opportunity, as we are gaining share in the space by serving smaller equipment makers who are growing in China, Korea, and Taiwan. It's important to note that we count among our customers 13 different makers of front-end deposition and etch vacuum equipment, so their gains, albeit individually small, collectively contribute meaningfully to our growth. We are also gaining more share from large OEMs as platform by platform they discontinue their own legacy automation solutions in favor of ours.

On the Contamination Control side, all indications are pointing to another strong year ahead. We had a record $24 million in revenue in the quarter, up 10% from the September quarter as we shipped the majority of product to equip 10nm foundry production. On a calendar year basis, CCS revenue came in at $68 million, up 50% from 2015, mostly driven by the accelerated growth of the need for this technology. Modest gains in market share do contribute to our growth, but we already capture most business at the fabs that are investing. In terms of outlook for CCS, we forecast that the March quarter should stay at approximately the same revenue level as December as we are beginning to ship more tools for 7nm production capacity.

Advanced Packaging was solid in the December quarter, down slightly to $10 million. For the calendar year, our Advanced Packaging business increased more than 30% in 2016 to $42 million. Our forecast for this segment is to be down a few million dollars in March, as there is no major back end factory capacity expansion, but we remain very active on the product development front and in position to benefit from the growth in this nascent market.

Specifically, we added three more design wins in the quarter, so that we now have won 33 different tool platforms across 28 different customers. We anticipate there will be additional back end capacity started before the end of the calendar year led by TSMC and their InFO 2 line.

It is remarkable how these three high-growth segments have advanced over the past years. In calendar 2016 alone, our revenue from these product segments combined to grow 27% over 2015, far outpacing the growth in front end wafer fab equipment spending, and these segments now collectively represent 62% of the revenue in our semiconductor product portfolio.

All in, the semiconductor business is very healthy and the significant changes that we have made to our portfolio over these past years has us positioned to take advantage of the strong growth in the most important trends that are driving the winners in the space. In terms of outlook for the Semiconductor business, March will be another strong quarter, and despite an expected reduction in Advanced Packaging, and flat CCS revenue, we look for semi to be up by at least $5 million in the March quarter.

Suffice it to say that we are positioned to grow, and we are capturing more of the markets that we serve. We remain persistent in the exercise of the actions that have carried us to this point and to this level of performance, product portfolio alignment and new product developments around growth opportunities and cost reduction and organizational efficiency. Overall, we have good momentum.

We've put ourselves into strong positions in two industries that are very healthy, and which we serve with leadership products. We are very much where we set ourselves up to be, and we are set to deliver on the top and bottom line. That concludes my formal remarks, and I will now turn the call back over to Lindon.

Thank you, Steve. Please refer now to the PowerPoint slides available on the Brooks website under our Investor Relations tab. To start the remarks, I would like to draw your attention to slide 3, which is a consolidated view of our operating performance. Our top line revenue increased 2% sequentially to $160 million in this first quarter of our fiscal year.

GAAP-based earnings per share came in at $0.20, an increase of 31% compared to the fourth quarter. In the GAAP results, we have a $1.8 million special gain recognized on the closure of our BioCision equity investment. Reduced restructuring charges in this quarter provided additional momentum to the bottom line. On the non-GAAP side of the page, adjusted earnings per share is up 12% to $0.25. I want to highlight that we have removed the special gain that I just mentioned from these results.

Revenue growth and lower operating expense drove a $1 million or 6% improvement in operating income. Non-GAAP gross margin was 36.3%, approximately 0.4 point softer than the prior quarter. The improved gross margins in the Semiconductor segment were offset by lower gross margins in Life Sciences. We will go further into this in a moment on the segment pages.

An additional $1 million improvement in net income came from strength in joint venture earnings. Our Japan-based UCI joint venture contributed $2.4 million of income, approximately $0.03 of our EPS line in this period. This joint venture with ULVAC produces cryogenic pumps used in the manufacturing process of OLED displays. The offsetting $300,000 loss in the joint venture line was driven by the negative income from equity in the BioCision business.

We will no longer see this degradation going forward from BioCision as we dissolved the BioCision equity investment in the final terms of acquiring their Cool Lab business on November 28. The newly acquired business was accretive to operational earnings on a non-GAAP basis in the very first month of ownership. Let's now spend some time to go through each segment.

On slide 4, we see a summary of the Life Science Systems results. Revenue grew $1.7 million, or 5% sequentially, to $33.3 million, showing six consecutive quarters of growth in Life Sciences. As Steve highlighted, $64 million of new contract value booked in this quarter underscores the continued momentum this segment is experiencing. Interestingly, both the revenue and bookings were evenly split this quarter between the BioStorage side and the core business of Life Sciences.

BioStorage reported revenue of $16.6 million. This is 16% sequential growth, up $2.2 million from our fourth quarter. In this quarter, we saw the seasonal dynamics of genomic services affecting our business. Just as we saw last year, the genomic services spiked up in the December month as customers in this space consumed their remaining year-end budgets.

While the revenue from the peripheral services will vary, the core storage has and will continue to provide good growth. The [core of] side of Life Science business was $16.7 million, 3% lower than the fourth quarter. But to keep this in perspective, this is 16% higher year-over-year compared to the first fiscal quarter of 2016. Let me add some specifics, and also provide some reassurance on the backlog going forward.

First, the softness we saw this quarter was primarily driven in lower consumables and instruments. This area has been stable in the past. We have made investments, and as Steve pointed out, the backlog we've added indicates growth going forward. The bookings in this quarter for consumables and instruments were higher than any quarter of 2016.

In the systems area, we were up 2%. This includes some softness in our large system projects due to timing of the projects, but is supported by the new BioStore III cryo products which achieved $0.8 million of revenue in the quarter. Again, the bookings in the systems area were higher this quarter than any quarter in 2016.

The services business for our systems customers was lower by 7% reflecting some upgrade in relocation services completed in the prior quarter. The bookings in this quarter, yes, they were larger than any quarter in 2016. In the first month of owning Cool Lab, we saw approximately $300,000 of revenue. As we disclosed previously, this business had trailing 12-month revenue of $5 million. It was accretive immediately this past month on a non-GAAP basis and is expected to contribute nicely going forward.

In total, our Life Sciences revenue increased 5% sequentially. Again, on a year-over-year basis, we grew 60%. That is 27% growth organically and we added another $8 million from acquisitions. We had a record bookings quarter, and the backlog closed at a high point.

As you can see, gross margin was down to 36% resulting in less gross margin dollars for the quarter. The lower margin percentage is primarily attributable to the mix dynamics in BioStorage, while the lower dollars in total is due to the lower consumables and services. We expect Life Sciences to return to approximately 40% gross margin in the second quarter.

We made modest investments in SG&A this quarter with hiring, but the primary driver of the operating expense growth was the commissions on the record-setting bookings quarter. We continue to be very pleased with the Life Science business and see ourselves nicely positioned for profitable growth through the rest of the year. We expect the second quarter to drive approximately $35 million to $37 million of revenue. Within this projection, we will see the seasonal drop in genomics, but anticipate the targeted growth to be driven by storage, the momentum of the core business, and the full quarter of the Cool Lab product sales.

On slide 5, let's look into the Semiconductor Solutions Group. The sales trend was modestly affected by the final effects of our exit of the distribution agreement of YEC and the IP income streams, which was about $2 million in the prior quarter, and are now zero.

As Steve has outlined, the drivers of the remaining $3 million growth can be attributed to Contamination Control Solutions, which increased approximately $2 million, and other automation and cryo products, which grew approximately $3 million. The offset to this growth was a decline of service revenue by approximately $2 million. The gross margin for the semi business increased 0.4 point to 36.4% driven with improved margins in the cryogenic products and increased leverage on a lower cost structure in total.

Regarding the structure, I want to update you on our restructuring progress at this point. We completed the $15 million restructuring announced last March within the September quarter, and we have shared previously that we were in the process of taking out another $8 million by the end of this March of this year. We are on track with getting the $8 million reduction.

In our Semiconductor business this quarter, we have completed the operational exit of the Jena, Germany location, consolidating refurbishment operations into our Chelmsford center to have one single new manufacturing and refurbishment center for North America and Europe. The building lease for the Jena site expires this month. And we are in the process of closing our Japan CCS location, which will be integrated into the supply chain management of our German CCS team.

In the Life Science business, we completed the transition of our Life Sciences team from the Oberdiessbach, Switzerland building, which we sold back in the fourth quarter. And we have transitioned our FluidX headquarters into our single manufacturing center in the Manchester, UK location as of January. This largely completes the planned resource and site integration of the past acquisitions in Life Sciences.

The charges for these actions were taken over the course of the recent three quarters. The actions outlined will in total drive approximately $6 million of the targeted $8 million of annual cost take-out. In terms of the timing of the $6 million of benefits, we have seen approximately $0.5 million of benefits accumulated into the quarterly run rate already, and anticipate another $0.5 million in the second quarter. We will update you again on this and the full $8 million of restructuring next quarter.

Let's turn to the balance sheet on page 6. There are three dynamics that stand out on the balance sheet this quarter. Inside working capital, which you can see, is flat to last quarter. We have an increase in accounts receivable, and a related increase to deferred revenue.

As we book new projects in Life Science, we often bill customers in advance for a portion of the project and then earn this over the course of the project. Most of the increase remains in receivables this quarter, but will convert to cash according to payment terms. Not all was driven by Life Sciences. We also carry deferred revenue for Semiconductor Systems, including the CCS systems, which are billed upon shipment.

But if it is a first-time system shipment to a new customer, we do not book the revenue until we receive final customer acceptance. In this quarter, we had initial shipments to a new memory customer. You also see an increase of trade payables driven by our current levels of production and a decrease in other liabilities which includes accrued compensation. The reduction in other liabilities was driven primarily by the payment of variable compensation for the FY16.

Finally, we executed the acquisition of Cool Lab in the quarter. This removed the BioCision investments in equity, the related debt and bridge loan instruments from the balance sheet. The sum of these based on fair value, and a $4.8 million cash disbursement, put the value of the acquisition at $15.2 million in total. Of this amount, $14.6 million went to the goodwill and amortizable intangibles.

Let's turn to the cash flow summary now on slide 7. Cash flow from operations was $19 million in the first quarter. As I mentioned, we held working capital flat, and free cash flow of $15 million. We typically build cash after covering the $7 million of dividends paid. As noted on the balance sheet, we used $4.8 million for the acquisition of Cool Lab. We closed the quarter with $89 million of cash, cash equivalents, and marketable securities. We carry no long-term debt on our balance sheet.

Most of our investors recognize the momentum we have seen in our earnings throughout this past year, but I take this opportunity to highlight to you that cash flow has been healthy, too. For the 2016 calendar year, our operating cash flow accumulated $71 million, and our free cash flow was $57 million. We returned $28 million of this back to investors in the form of dividends. We are very pleased with the strength of this balance sheet.

Let's go on to slide 8, and address the outlook for our second quarter of FY17. Second quarter revenue in total is expected to be in the range of $165 million to $170 million. This reflects approximately $35 million to $37 million in Life Science with the balance in Semiconductor. Non-GAAP earnings per share is expected to be in the range of $0.24 to $0.27. This reflects the growth combined with lower expectations on the joint venture earnings.

GAAP earnings per share is expected to be in the range of $0.18 to $0.21. Our GAAP estimated numbers include the impact of amortization of intangibles, restructuring, and any special charges. That concludes our prepared remarks. I will now turn the call back over to George, our operator, to take questions from the line.

(Operator Instructions)

Our first question comes from the line of Edwin Mok with Needham. Please go ahead.

Hey, thanks for taking my question. Congrats on a great quarter. First, I have one on the semicap side.

Steve, I just want to clarify. Did you say that you expect your June quarter to be as strong as your March quarter for the semicap business? And among the drivers that you highlighted, what is driving that strength in the June quarter?

Yes. Edwin, we know March is going to be strong. What we're getting as signals from our customers is that we need to be prepared for kind of the same level of activity in June. So orders always come a little bit later, but supply chain ramps have begun, and so we don't anticipate a big fall-off, if you will, for June. It's a little bit early to call it, but all the -- all the requests we are getting from our customers is to be able to sustain in June like we are in March.

Okay. That's helpful. I think Lindon mentioned in his prepared remarks that you guys are going to order for the CCS system, you had the shipment of CCS system to a memory customer. Steve, can you talk about the memory opportunity for this business? I think historically you are predominantly a foundry and logic, just curious, how do you think about -- is that really an expansion story behind this offering?

Yes. Edwin, I think the memory is still going to be a lot less than we see in foundry and logic. But we have four memory customers right now, and the shipments are a few tools as opposed to tens of tools.

But we don't know where that will go ultimately, and we don't know also about the complexity of the multi-layer 3D nan. But right now we look at memory as a modest opportunity, certainly a transistor formation, it's pretty critical. We are not sure if it will drive any additional expansion. It's going to be a good steady business for us, but not like foundry.

Okay, great. Let me ask you a question on Life Science. You mentioned that you have signed much larger deals with more bundles. I was wondering, is that any risk on pricing? Customer want to buy more from you, all these different services, they might be asking for discount. Should we start to -- is there any concern that that might ultimately have some -- put some pressure on margins?

We haven't seen any so far. I think the customers actually, Edwin, at this point are pretty delighted to be able to get capability from us that can serve a lot of their needs. So it's not a pressure point so much as really to take on more things that they didn't know we were able to do. So, no, it's not a price pressure issue. I think it's a tremendous value add is what we're finding out so far.

Okay. Last question I have. I'll let the other guys ask -- just in terms of kind of directionally your gross margin and OpEx for the March quarter, if I understand you correctly, it sounds like you expect gross margin to recover especially on the Life Science side, but seems like you also expect OpEx to increase in the March quarter. Can you help clarify that and what's driving that?

Yes. You read that exactly right. We have some margin improvement we anticipate driven primarily from the Life Science, but we also think we will have a little strength in -- on the semi side. In total, we think we will be up about 1 point. And then on the operating expense, we are making some continued investment. A little bit of that will be in the Life Science. And we are also doing some strategy work to make sure that we grow that business completely.

Okay. Great. That's all I have. Congrats again.

Thanks, Edwin.

And our next question comes from the line of Patrick Ho with Stifel. Please go ahead with your question.

Thank you very much. Steve, given the current semi environment and the outlook that you have provided for March and June, I know your lead times are generally short to begin with, but do you see any supply constraints on your end given the activity that's out there, especially in the entire food chain? How comfortable do you feel that you will be able to meet this strong demand over the next two quarters with your own supply chain?

We are working really hard. But we feel pretty confident that we have good touch points everywhere. But I do hear that the supply chain is pretty strained everywhere. We have been out months in advance trying to get everybody ready.

Anything could happen, but I think things are tight, but we're all working to make sure that we meet the requirements of our customers right now. So we're -- we think we're prepared. How about that?

Fair enough. Going to the Life Science side, really strong bookings quarter. I know this is probably something that you don't have to quantify, but maybe qualitatively talk about, given your broad product portfolio now that you're offering, can you give instances where you are now starting to see the leverage of, okay, now purchasing of the storage solution also leveraged some consumable buys and things of that nature? How much of that contributed to the really strong bookings quarter on the Life Science end?

Thanks, Patrick. Let me give you maybe a little example here. As we have been talking with everybody, we have more than 900 active customers right now for Life Science, including all of the, 20 of the largest pharma companies.

We help them manage tens of millions of samples in various ways. We probably shouldn't even call them samples. These are really prized assets that provide the path for how these guys are going to make cures. So they're critical assets for these companies.

And to say we really don't have a single solution, for example, for the products that we provide to Merck or to AstraZeneca, or to GSK, they are all different. But they are always tailored to their specific needs and whatever handling protocols they have. And likewise, we do things for biotech and healthcare institutions that are pretty different. So what we do for [grail] and what we do for Duke University are, again, capabilities that we bring that are similar elements, but always packaged pretty differently.

We do have one, probably one really good example I can refer to. It's the capability we provide to Bristol-Myers Squibb. BMS is a customer for about everything that we offer. So they are a customer of the large automated compound stores. They have our automated BioStore III cryo systems, and those are both for on-site sample storage.

We also provide to them on-site and off-site sample management services through BioStorage, and we also provide them genomic analysis solutions. One other capability that they buy from us, that is something you'll hear about more as we continue to build out this business, is they also use our informatic software, both to manage their workflows and to connect a pretty distributed sample inventory collections that they have around the world. And, frankly, they also use our consumables and instruments for collection and storage.

So as we build, this is a pretty broad range of offerings. Some of the large pharma companies are beginning to use more and more of the capability, but we are also offering this to academic, to the biotech companies, and we do see the capability building. So the reason we think that some of the contracts are getting larger, some of the opportunities are getting larger, is because we are about able to bundle these capabilities and really solve workflow issues around these kinds of assets.

We are really bullish about it. The customer base is helping us to define what those things are, but as a pretty flexible Company, we have been able to put those things together in high-value packages. We anticipate more coming.

Great. And final question for me on the BioStore III, the small sample storage, where it had the initial slow traction and adoption of it. Do you feel that you have now reached that inflection point and that will be an area of growth for that product in 2017?

It will be growth in 2017, but we haven't hit the position yet. Patrick, I am going to anticipate the pressure from you every quarter for a while, and we'll deserve it. But we're working really hard. I think the thing that's most encouraging for us is we developed a larger capacity version of it, and we sold units to two different cell therapy companies this quarter.

And they have a very specific need for this, which is exactly the reason why we defined it. But it will take them some time to evaluate, and we will look for the next customers to get into evaluation mode. There is definitely volume capacity behind, but they will have to test this for some months yet. But we are really positive about the opportunity.

It will be bigger in 2017 than we were in 2016. That's not a difficult feat. But we do want to exit the year with a lot more momentum. We think the right things are happening. The right things happened in Q1.

We will absolutely report every quarter how we are doing. I won't say we have tremendous traction, but where we have those tools in place is exactly where they should be. So we'll -- we've got a lot of work to do, but we're encouraged by it. We had some pretty aggressive objectives for this year. We haven't let up on them, but we do have work to do.

Thank you very much.

Thanks, Patrick.

And our next question comes from the line of Paul Knight with Janney. Please go ahead with your question.

Hey, guys, this is actually Bill on for Paul. How are you doing?

Hi, Bill.

Really good, Bill, how are you?

Doing well. First, just on the Life Science business, with the seasonality associated with the genomic services, could you give us a sense of how much that impacted margins in the business in the quarter?

Yes. Bill, it's safe to say that we would have been approaching, if not already 40% without that mix impact. We had a little softness in the consumables. So that's a piece of the mix, as well. But the BioStorage itself, we saw this last year in December, as well.

Last year it stood out because we only owned them for the month of December, and it was like half of that revenue that we had last year, and we saw growth on both sides year-over-year, but with a full quarter of it here. But it was pretty substantial. And I would tell you we do not see that we have a margin issue in the business in any one of these segments.

Some of our investors have been with us for a long time, but recognize that we did two years ago. We don't have that now. We are at that 40% level in a normal quarter.

Got it. And then maybe just back to the commentary around bundling. Could you just talk about whether that has -- those conversations have been happening with existing customers that were either using the legacy products or BioStorage, and just maybe about the cross-selling conversations you have been having with the customers?

Sure. It's for sure the conversations are going on with all of the customers who are existing customers. So if they -- Bill, I will give you an example.

When a customer has a cold store, even if it had not been a BioStorage customer, when it gets to the point where the cold store is beginning to be full, some of those samples really ought to be archived. So rather than having them build, or purchase, another large store, they may be able to free up capacity by taking some of the samples that really ought to be archived and moving them off site into Indianapolis.

Sometimes they have a move they want to do. Sometimes they want to take a distributed collection and centralize it. Actually, with every customer we could have a conversation around additional capabilities we could bring to them. So if they are a services customer, there are infrastructure conversations to have. If they are an infrastructure customer, we could talk to them about services.

And with almost all of them we can have the conversation around things like genomics, around consumables, around instruments, and informatic. So the richness of the conversations has expanded, and we spent a lot of time training an excellent sales force on the elements of the offering that they are not familiar with. So we're learning how to do it. Some people are really excellent at it.

But we are building a sales team that's able to have a conversation about the customer's sample issues, and with almost every conversation we have something to offer them that will provide a benefit. So we're learning how to do it, but we have had a lot of success so far.

Great. And just one last one. Just strategically, the decision to acquire Cool Lab and bring that in-house as opposed to keeping the JV structure, kind of what the rationale was for that and how that's progressing? Thanks, guys.

So for both of us, actually, it was a product line that fits exactly into our sweet spot. The founder of the business also had thoughts about what to do with a different portion of the business. So the timing worked out well.

It was something that we had always been close to. It worked out just perfectly for us to be able to take that part of the business and for the founder to go off and take the other portion of the business and run that separately.

Great. Thanks.

Thanks, Bill.

(Operator Instructions)

We have a question from Ben Rose with Battle Road Research. Please go ahead with your question.

Good afternoon.

Hi, Ben.

Question. I was running pretty feverishly on the vacuum automation commentary that you had. Did you quantify -- and I apologize if you did -- the revenues from vacuum automation this quarter versus last year?

No. Ben, we gave the growth rates to give indicative trends, but we don't split out the elements of the portfolio specifically in dollars.

Okay. And those growth rates were only on a sequential basis, is that right?

Yes, that's right.

Okay. You mentioned that there was strength from both the large OEMs and some smaller OEMs for vacuum automation. Looking out regarding the commentary that you had about March and June, is that -- are those kind of stronger indications coming from the large OEMs or from the smaller ones?

Right now from the larger OEMs only.

Okay. And with regard to the Life Science business, I know you've talked about restoring a 40% gross margin this quarter. What do you think would be -- what would be a reasonable gross and operating margin target exiting FY17?

Well, what we had indicated, and we still have conviction around, is that for the year we will be at something north of 40%. And so we just did one quarter at 36%. So you could take it from there on the arithmetic. But somewhere north of 40%.

I won't put a specific number on an exit rate. You can see we've got some -- a revenue ramp ahead of us with that growth. I think you're going to see improved margins in the second half at the operating margin off of leverage, and gross margins, I think, will work themselves up above 40%.

Okay. And on the operating margin line, any color beyond sort of incremental operating margin improvement?

No, we haven't laid that out. I appreciate the desire for it. Last fiscal year in total, that operating income was negative $5 million. We were profitable in the second half of the year, but the first half we were down about $6 million.

This year we are profitable starting off the year, and we expect it to continue. We do expect the leverage to improve, but I won't put a number on it as we continue to make some investments. Thanks.

Okay. And, Lindon, sorry, just one final question. In looking over the cash flow on slide 7, I think there is a notation on the bottom that $4.8 million was for the Cool Lab acquisition, and yet acquisitions are listed as $5.3 million. I am just trying to reconcile the two figures.

Yes, we had a remaining payment that was disbursed related to a prior acquisition on an earn-out, that was related to our Japan acquisition in the CCS business. But the bulk of that was cash disbursed for the Cool Lab purchase.

Okay. Thanks.

You bet, Ben. Thank you.

There are no further questions at this time.

All right. Well, we thank everyone for their interest and the time that they spend with us. We always look forward to seeing you as we move through the quarter. For now, we'll look forward to talking you at the end of our second fiscal quarter. Thank you very much, George, for your help.

Thank you. Thank you very much.

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