Azenta Inc (AZTA) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Fourth Quarter and Fiscal Year 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, November 9, 2017.

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

Thank you, Nelson, and good morning, everyone. We would like to welcome each of you to the fourth quarter financial results conference call for the Brooks fiscal year 2017.

We will be covering the results of the fourth quarter and fiscal year, which ended on September 30 and then we will provide an outlook for the first fiscal quarter of 2018 ending December 31, 2017, and we will provide an update to our target model for 2019. A press release was issued earlier this morning 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 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 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, our performance highlights and then we'll provide an overview of the fourth quarter and full fiscal year financial results and a summary of our financial outlook for the quarter ending December 31, which is our first quarter of the fiscal year 2018. We will wind up with an update to our 2019 model and then we will take your questions at the end of those comments.

During our prepared remarks, again, we will from time-to-time, make reference to 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 morning, everyone, and thank you for joining our call. We're pleased to report you on results from a very solid fourth quarter that caps an outstanding fiscal 2017, a year in which we advanced all our strategic initiatives and one that positions us for an even stronger fiscal 2018.

One year ago at this time, we said that we were at an inflection point, and we expressed our confidence in our ability to deliver substantially improved performance in both the rapidly expanding Life Sciences market and the buoyant semiconductor equipment space. As it turned out, we were right and we were ready.

For the year, we grew revenue 24% to $693 million with Semiconductor up 20% and Life Sciences up 38%, two very strong businesses demonstrating exceptional growth. And today, as we look into 2018, we have much the same sentiment as we see demand from our core markets lining up to be even stronger than last year, and we're armed with new products that are specifically designed to take their place in our customers' technology and production road maps.

We see the Life Sciences market providing steady, rapid growth for us as the ever-increasing demand for samples is expanding our opportunity both because of the sheer number of samples that are collected and stored, but also because more and more customers are looking for help from a supplier who can give them a workable solution for the efficient and precise management of these vast and valuable collections.

The collection of samples is not new, but the means by which these samples are managed is undergoing a dramatic shift because the value of the sample is now more than ever dependent upon the preservation of the sample in a cold environment and the data and information that must reliably be attached to each of these samples.

On the Semiconductor side, we're benefiting from the wave of mobility, Big Data, Internet of Things and AI applications that are pushing leading-edge logic device technologies to 10 nanometer and below and simultaneously fueling a swell in memory demand, which currently does not show signs of slowing.

On the contrary, the technology drivers remain robust, and if we are to believe our OEM customers, we may be in for a new realm of semiconductor opportunity that's fueled by an annual wafer fab equipment spending above $40 billion as a norm.

This morning, I'll use my comments to expand on how we see ourselves advantaged by these megatrends, and hopefully, give you a sense as to why we're optimistic about our position in these industries.

I will give a summary of highlights from our segments, beginning with a recap of our Life Sciences business performance. Revenue came in at a very strong $44 million, up 39% from Q4 last year. Organic growth was 25%, delivering our fourth consecutive quarter of organic growth of 25% or greater. In

our core revenue lines of businesses, storage services, automated stores and consumables and instruments, we demonstrated solid growth. Storage services revenue with $20 million set a new quarterly record, was up 40% versus prior year. The automated stores business was also strong, coming in above $8 million for the quarter, up 28% versus prior year. And bookings at $11 million for the quarter kept a record order year continuing our strong momentum in this segment. Consumables and instruments revenue increased to $8 million, up $2.2 million or 36% versus prior year, as we're beginning to see the traction from some of the additional sales resources that we added earlier in the year.

With these relatively stable parts of our business moving steadily along, there are 3 initiatives that I want to highlight, which represent tremendous organic opportunities for us. The development of a cryogenic temperature cold-chain solution for immunotherapy applications, the launch of an informatics offering to help customers recognize more value from their sample collections and the pursuit of the massive cold-chain opportunity that's rapidly developing in China. And I'll give a brief update on each of these focus areas.

We're encouraged by the strength in our cryo system products as we topped $2 million in sales for the quarter. Although we're in the early days of what this market can potentially become, we now have 27 customers using more than 60 B3 cryo systems at 30 sites across 12 countries. Cell therapy is a global phenomenon and bringing it to a mainstream reality will require an automated workflow that includes cryogenic temperatures for storage and transportation of samples. We expect that this business will be up and down for a while, but this is what a new technology penetration plan should feel like and we'll continue in our penetration efforts in 2018. We believe the enormous market potential for our solutions validates our investments and continued persistence in this area.

On another of our new product themes, last quarter we mentioned that we had launched a new informatics platform called BioStudies, an integrated workflow and inventory management solution that allows users to more fully recognize the value of their sample collections by incorporating critical information about not only the location and condition of their samples but also critical annotation that includes information about sample provenance, temperature history, phenotypic data, consent status and many other important factors.

And in September quarter, we significantly enhanced our informatics value proposition and 3 accomplishments are worthy of note. First, we successfully signed off our first BioStudies sample management installation at the U.K. Biocentre. Then we secured a multimillion dollar BioStudies order in a competitive bid process against more than a dozen competitors to provide informatics software to a large global pharmaceutical company who is looking to connect the distributed sample collection. And in August, we acquired the FreezerPro product line. The FreezerPro software is a cloud-based mobile application that allows small- and medium-sized collections to be tracked and managed. This informatics opportunity is still young, but our offering looks like it hits the very critical segment of this market.

These 2 organic vectors, the cryo cold-chain and informatics combined to contribute approximately $7 million of revenue in 2017, and though small, both represent important growth opportunities for us. We plan that revenue from these offerings in 2018 will still be modest, however, we do intend to use the year to position ourselves for the long term by securing more of these high-value offerings with market leaders.

In one other important development related to opportunity expansion, for some time now, we've had our sights set on China and the tremendous potential to be part of the sample management solutions for some of the larger studies the world will know. I'm pleased to announce that in the quarter we captured an important and influential win at a major Beijing-based research institution. The agreement is for us to deliver 3 large automated cold stores, each with a capacity to store millions of biological samples. This is in addition to 8 BioStore III Cryo systems, which will be installed at the same institution. This significantly positions Brooks at the heart of what has the potential to be the start of a countrywide research and bio sample network.

This partnership requires some investment by us, and the first phase will be relatively low-margin business. But we believe that this premier BioStorage penetration positions us well for subsequent opportunities in China. We're thrilled about this win, and we're working diligently with the customer to be able to deliver what's planned to be the first of more than 10 biobanking sites in this consortium. As you can sense, we sit uniquely in the center of a global opportunity to change the way that samples are managed. We're recognized as a leader with the only complete sample management solution, and we have new business chances at every turn.

As we launch into fiscal year 2018, it's useful to reflect on the momentum that we generated in our Life Sciences business in fiscal '17. A few of the full year highlights include revenue of $149 million, was up 38% above fiscal 2016 and was fueled by organic growth of 27% year-over-year; bookings of $189 million helped to build backlog by $40 million. Life Sciences operating profit of $7 million represented a positive swing of $11 million.

We sustained our appetite for acquisitions as we acquired Cool Lab products from BioCision, PBMMI and FreezerPro, and in the first week of fiscal 2018, we acquired 4titude, another nice addition to our consumables business portfolio.

We almost doubled our customer list to more than 1,000 active customers, more than 100 of these were accounts which we won first-time business in the year. And most importantly, we're providing full cold-chain sample management solutions that are accelerating a change in the way that customers manage their collections and where they hold their samples. We've demonstrated the ability to win and deliver more business that gives us confidence about our growth potential. Because even at $150 million in annual revenue, our business is still only just beginning to penetrate a market opportunity, which measures in the billion of dollars.

We will remain aggressive in our development of the new cryo cold-chain solutions. We're positioned to add more capabilities to the company via acquisition, and we have a healthy pipeline of excellent candidates. We have a strong cash generation capability, a healthy balance sheet and an appetite to expand both organically and by acquisition. We'll be profitable as we grow, but we believe that now is the time to secure our portfolio and our share position.

We look to 2018 to be another year with quarterly sequential revenue growth, and again this year, we forecast growth in Life Sciences above 30% for the full year.

Turning now to our Semiconductor business. We're definitely the beneficiaries of not only the strength in the semiconductor chip markets but particularly 3D NAND memory and advanced logic, which are huge consumers of vacuum process technologies. Overall, growth in our Semiconductor business was 20% for the year and that's net of a 6% headwind from the lack of revenue from license income and revenue from the Yaskawa joint venture that we concluded late last year. We doubled operating profit, gained more market share and further strengthened our position in our targeted high-growth sectors.

For the quarter, our Semiconductor business came in just about as we forecasted with continued strength across most of the portfolio, down slightly due to a softening in the contamination control business, which we'd forecasted. Operationally gross margins increased sequentially by 180 basis points, and we continued building our future by securing more new design wins. We remain heavily invested in 3 growth drivers that we believe will propel our business, and in 2017, we also benefited from our resurgence in our cryogenic vacuum business.

I'll report briefly on each of these segments now, starting with vacuum automation. In the vacuum automation business, demand remained robust as vacuum robots revenue was at another record level and vacuum automation systems, although strong, was down slightly in the quarter.

Noteworthy in the quarter, we had 2 more MagnaTran LEAP next-generation vacuum automation solution wins as we put more space between our star capabilities and those of our competitors. For the year, we secured more than a dozen new design wins with this next-generation capability, including 9 new tool platforms at 2 of the largest OEMs in the deposition and etch space.

To put our strong market position in perspective in fiscal 2017 compared with full year 2016, we had 45% growth in our vacuum automation revenue. That kind of growth came from our existing customer business expansion and additional market share gains with global market leaders for advanced deposition and etch applications. Next quarter, we estimate that our vacuum automation business will remain strong at approximately the same levels, which is consistent with OEM forecast for equipment shipments in the quarter.

Advanced packaging has been a steady segment for us in 2017 and despite a modest drop in revenue in the quarter to approximately $13 million, we finished 2017 with $46 million in revenue, which was up 13% from 2016. We're already working on new designs that will handle the next-generation of complex substrates that we see coming in 2018, and we're positive on our position in this market. Even without a definitive plan for the next TSMC InFO line, this business remains healthy as OSATs and device makers with packaging operations are beginning to adopt these same process tools for their advanced packaging lines. Our market share and momentum are good, with more than 25 customers across 8 different applications.

Our Contamination Control Solutions business came in exactly at our forecasted $15 million, down about $5 million from the June quarter. Our market position continues to be strong, and we gained more share from some new wins in China and Taiwan. And we qualified a set of FOUP cleaners for production release at a major IBM. So we are now in volume production at 3 customers who are running 10-nanometer production.

Additionally, we continue to lead the market for EUV pod cleaning and we further expanded our footprint by winning another EUV reticle stocker in an advanced development path.

To recap the year, our CCS business was up 63% over 2016 to more than $80 million. We've maintained our very high market share position throughout 2017, and we won most of the new opportunities that we've completed for. This being a new necessary technology for leading-edge device manufacturing, we anticipate that CCS business will see higher volumes coming as foundry and logic capacity are added, most likely in early to mid-calendar 2018. Until then, our revenue will mostly come from memory and Tier 2 foundries.

I do want to make a note about our cryo vacuum franchise. A year ago, we described the PVD and ion implantation, the 2 semiconductor process steps that use cryopumps, have been down in 2016, but the 2017 looks to be stronger. Even at that time, we did not have an idea just how strong these markets would be. But for fiscal 2017, we saw 40% increase in our cryopump business for semiconductor and a 70% jump in our cryochiller business, which is largely tied to the display market. Our leading market share positions in this vacuum creation space was already strong, but continued to improve in 2017.

Revenue increased each quarter through the year taking us to a new record level in the fourth quarter and business feels equally strong as we enter the first fiscal quarter of 2018.

We had an outstanding year in semi and our strong defensible positions in high-growth applications continue to support our contention that we ought to be able to grow our semi business 2 to 4 points higher than the growth in the wafer fab equipment market in coming years. We continue to invest in each segment to further strengthen our market leadership and secure our position and our customers next-generation plans.

Even though December will be another slower quarter for Contamination Control business, we anticipate growth in the remainder of the semiconductor business, an indication that we're receiving from our customers that we should expect strong momentum at least into the March quarter as well.

All in, fiscal 2017 was one in which we began to showcase the capabilities within building and the transformation of the company. We have 2 leadership businesses supported by investments that signal our intent to continue to outgrow our market segments. We're taking full advantage of the value compounding effect of outperforming in sectors that are themselves outperforming, and we look to exercise our position and capability as we move confidently into 2018.

And that concludes my formal remarks. And I'll now turn the call back over to Lindon.

Great. 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 fourth quarter operating performance.

Our top line revenue was flat sequentially at $182 million, driven by 20% increase in Life Sciences and an expected 5% decline in semiconductor solutions. On a year-over-year basis, the $182 million of revenue increased 15%, reflecting Life Sciences revenue growth of 39% and Semiconductor Solutions growth of 10%. Life Sciences revenue in the quarter amounted to 24% of our company total.

In the GAAP results, earnings per share remained at $0.25 even with the third quarter results. This reflects a benefit from higher gross margins and lower taxes, offset largely by higher operating expenses. The EPS of $0.25 is 62% higher on a year-to-year basis compared to the same period of fiscal 2016.

Looking at the non-GAAP picture on the right, let's walk down the P&L. The non-GAAP gross margin increased 130 basis points to 41.3%. We saw a modest increase in Life Sciences margins, but the significant improvement was driven by higher margins in the Semiconductor segment. Operating expenses increased $4.3 million reflecting growth in both segments.

The increase in R&D was driven largely by investments in Life Sciences. The increase in the G&A also reflects further investment in Life Sciences, including the July acquisition of PBMMI sample storage business and additional hiring for sales and operations. We also saw an increase across our business in commissions, variable compensation and the noncash expense for long-term incentive plans.

Down below operating income, the tax line reflects a 13% non-GAAP tax rate for Q4. Our joint venture income came in at $2.1 million in the quarter compared to $2.5 million in the third quarter. This amount is after tax and is realized from our Japan-based joint venture, UCI, which provides cryo vacuum pump products into the OLED capital equipment market.

At the bottom line, we produced $25 million of non-GAAP net income, $0.35 per share and $37 million in adjusted EBITDA. As noted on the chart, our adjusted EBITDA has increased 51% year-over-year and is up 2% from the third quarter. The solid improvement seen through 2017 remained with us.

Let's turn to Slide 4 to review the full year 2017 performance. In fiscal year 2017, we added $133 million of revenue to our top line or 24% growth. $15 million of this growth came through acquisitions. This includes the recent addition of the PBMMI BioStorage business, the BioCision product line acquired in our first fiscal quarter and a 2-month comparison benefit in BioStorage Technologies, which we had acquired 2 months into our 2016 fiscal year. So setting aside these and the $3 million drive from currency, our total Brooks business had 22% organic growth in the year.

Gross margins expanded 3 points in the year. Recall our restructuring programs driven through 2016 and '17, in which we removed a total of about $23 million of annual run rate costs. Some benefited us in 2016 and then 2017 saw the full year benefit.

The lower fixed cost structure, increased volumes and growth in high-value products and services have taken us to record gross margins. We have deployed operating expense investments through acquisitions as well as hiring to support our growth. In total, we achieved a 9% net income margin on the GAAP basis and 13% on the non-GAAP basis.

Let's turn to Page 5 to begin discussion of those segment results. In the fourth quarter, the Life Sciences revenue was $44 million, which was an increase of 20% sequentially and 39% year-over-year. Within this 39% growth year-over-year, the organic growth was 25% this quarter. Given the notable sequential growth of 20%, let me break that down for you.

Compared to the third quarter, BioStorage services revenue increased 32% quarter-to-quarter, which includes the revenue from the acquisitions and 10% growth from the pre-existing BioStorage business. The remaining core infrastructure and consumables revenue also grew 11% compared to the third quarter.

The total bookings in the fourth quarter for Life Sciences were $35 million, bringing the full year bookings total to $189 million, which is up 30% compared to fiscal year 2016.

I will take a pause from the chart here to update you on the mix of our Life Science business. The storage services business, except for the seasonal nature of calendar year-end, has seen steady sequential growth each quarter since we acquired it 8 quarters ago. Meanwhile, our core infrastructure and consumables business has seen a steady surge of growth all of this year and received another boost from the automated cryo stores revenue, which Steve highlighted. The storage services business represented 46% of our revenue in the quarter with the core infrastructure and consumables offering making up the complement.

When we strip out the recurring nature of these businesses and combine the consumables and services from infrastructure with recurring storage services business, the recurring portion of revenue of the Life Science business was approximately 53% for the year.

Referring back to the chart, Life Sciences adjusted gross margin in the fourth quarter came in at 38.2%, up 0.1 point from the prior quarter. The storage services business came in approximately 1.4 points lower than third quarter, impacted by a higher mix of genomic services revenue. And in the core infrastructure and consumables business, we saw an improvement in the gross margin of about 8 turns sequentially. We expect the Life Science segment to achieve 39% gross margins in the first fiscal quarter on approximately $47 million to $49 million of revenue.

The summary of the full year has a similar profile as the fourth quarter. 38% revenue growth, 27% organic growth and segment profit increase of $11 million year-over-year.

Steve has highlighted the hallmark changes in this business, where our expectations going forward, we look forward to another strong year of growth in 2018. With all acquired businesses counted, we see 30% growth or better for the year with margins above 40% for the year. Our confidence is reinforced with the strength of the backlog and the recurring revenue base the team has built.

Let's turn to the Semiconductor business on Slide 6. Semiconductor Solutions revenue declined 5%. As anticipated, contaminated -- Contamination Control Solutions provided $15 million of revenue and was the principal driver of the decline, down approximately $5 million. We had slight softness in automation, largely offset by growth in cryogenic vacuum products and continued growth in our services business. In total, we are pleased with final revenue of $138 million, which was 10% above the fourth quarter of 2016.

Adjusted gross margins improved 1.8 percentage points to 42.3% this quarter, resulting in approximately the same gross profit dollars as the previous third quarter.

The progress in the quarter reflects a few dynamics. Our manufacturing and services fixed cost base had improved utilization and our mix of revenue was favorable.

The operating expense line grew in the quarter. The increase this quarter was primarily driven by the higher variable pay and stock compensation expense explained earlier as well as increased R&D projects.

The full year results shown on the right side reflect the value of our portfolio and the leverage of the fixed cost and expense of the Semiconductor Solutions segment. Revenue growth of 20% was driven on a 4% operating expense increase and supported nearly 4 full points of gross margin improvement. The expansion of contamination control with fabs and that of wafer level packaging with many customers drove value into our sales mix. The restructuring actions taken in 2016 and through 2017 also set the stage for the fixed cost leverage improvement, helping us in total to drive gross margins above 40%. At this revenue level and with operating margins above 16%, we're already operating well above the 2019 target model we proposed one year ago.

So let's turn to the balance sheet on Page 7. Looking at the changes in the quarter, most significant is the $31 million increase in goodwill and intangibles, driven by the acquisitions in the quarter. Inside working capital, other current liabilities increased $11 million, which includes normal compensation and tax accruals. This was largely offset by the decrease in deferred revenue, reflecting progression of our life science system projects and customer acceptances for past shipments of contamination control products.

On the full year changes, you'll see the similar increase for goodwill and intangibles as the largest portion of acquisitions closed in the fourth quarter. The working capital increase of $9 million includes $3 million added from acquisitions. Deferred revenue remains higher at the year-end than when we started the year as does current liabilities.

Receivables and inventories do show an increase and have supported the growth with improving efficiency. The receivables day sales outstanding metric improved 4 days this year to 60 days and inventory turnover improved 0.6 turn to 4.3 turns.

With the increase of income and efficiencies in assets, we achieved an ROIC of 12.9% for the year. And at the end of the year, we finished with $104 million of cash and equivalents on the balance sheet.

Let's turn to Slide 8. We finished the year strong with $35 million of operating cash flow in the fourth quarter. In addition to the dynamics I just described to you, I will highlight that we had $5 million of dividends from our joint -- our Japan joint venture contributing to the quarter and the full year. The CapEx line reflects $6 million in the quarter, which drove the full year to $13 million. We're in our 7th year of paying a dividend, returning $7 million to shareholders in this quarter. Cash from operations stood at $96 million for the year and free cash flow was $84 million.

In summary for fiscal 2017, our cash balances expanded by $13 million to the $104 million on this report. This is after paying $45 million on acquisitions, $28 million (sic) [$27 million] in dividends and $13 million in capital expenditures in the year.

After the close of the quarter, we announced the acquisition of 4titude, a manufacturer of scientific consumables for biological sample materials used in a variety of genomic and DNA analytical applications. The purchase price was $66 million in cash, net of cash acquired. Currently, with the acquisition, we announce that the company secured $200 million 7-year senior term loan agreement, providing us with additional liquidity and capital for growth. It is important to note that interest expense in 2018 is expected to be approximately $9 million in the year or $2.2 million each quarter.

Slide 9 addresses the outlook for our first fiscal quarter of 2018. First quarter revenue is expected to be in the range of $182 million to $188 million. Adjusted EBITDA is expected to be $34 million to $38 million. Non-GAAP earnings per share should be at $0.27 to $0.32 per share, while GAAP earnings per share is expected to be $0.19 to $0.24.

So now we normally stop our remarks here. But we have seen significant changes to the makeup of both business segments. The Semiconductor business is already running into the 2019 performance range, and in Life Sciences, we have completed 3 acquisitions in the past 4 months. So please turn with me to Page 10 for an update to our 2019 target model.

The revenue range at the top reflects 7% to 12% growth. This allows for a modest expansion of 2% to 8% compounded annual growth rate in our semi revenue. If the semi capital market is flat, we expect to be at the bottom of this range, or 2 to 3 points better than market. If the market grows 5%, then we expect to see the top end of the range.

In Life Sciences, we have modeled approximately 20% organic growth plus the benefits of all the acquisitions made to date, including 4titude, which closed in October.

For gross margins, we expect semi to sustain the 41% we've seen in recent quarters and expect Life Sciences to operate in the range of 42% to 44%. The expense line provides for approximately 5% continuous annual growth to support 7% to 12% revenue growth in total.

As you can see, the leverage is impactful, bringing us to a range with midpoint of $1.65 or approximately 16% growth each year.

We mentioned earlier we've taken on $200 million in debt, and this range of EPS reflects carrying interest cost of approximately $0.10 in 2019. We've not included benefits of future acquisitions here, but we do expect to acquire more and we look forward to adding to the adjusted EBITDA range on this chart.

That concludes our prepared remarks. I'll now turn the call back over to Nelson to take questions from the line.

(Operator Instructions) Our first question comes from the line of Farhan Ahmad with Crédit Suisse.

Your Life Sciences business has shown a lot of growth recently and you are continuing to grow it. Can you talk about the synergy going forward within the Life Sciences and your semi business? And does it make sense for the 2 businesses to exist together accompanying going forward? And how do you see the businesses evolving?

Yes. This is a really good question. It's one that we spent a lot of time on. Let me give you a couple from the product and technology standpoint. One of the things that Dusty's team has done is they've utilized some of the cryogenic capabilities of the company and they've employed it now in 2 different methods and 2 different designs for cold stores, with the third coming. So we have some overlap remaining from a science and technology standpoint, but I think it's been put to good use and makes for a much more efficient store. And I think this is really well received by the customers. At the sales level, at the business development level, however, they are pretty separate businesses. And of course, as we've grown both businesses, we still rely on the cash generation capability of really strong semi business to help fund growth in both segments. In time, we will always be open to whatever the best thing is for the shareholders. We still have a small Life Sciences business. And we're adequately both capitalized and able to generate cash to support it. But we'll always be looking at the future. But right now good overlap from a technology standpoint. And the freedom to -- and the ability to fund growing Life Sciences business that's really flourishing, we think. So right now, we are content with the position that we have, but we will pay close attention to this because we plan a pretty significant growth here and Life Sciences will continue to gain mass and be a more significant part of the company.

Got it. And then just one question on the gross margins for Life Sciences. If I go back a couple of quarters, you were expecting the gross margins by end of the year to be north of 40%, but they are around 38%, 39% right now. Can you just talk about why the gross margin is coming in a little bit lighter than what you were expecting a few quarters ago on the Life Sciences side. Is it just impact from the acquisitions? Or is there some mix issues?

Yes, Farhan. It's a really fair question. And we -- and I would emphasize upfront that we are expecting the business to run at 40% overall and better in the near term, we can get to that 42% to 44% range by '19. In this period, we have seen a couple of things happen. One, we did have a little more mix of genomics-related services. So typically, in the past 2 years, we saw a pretty significant spike in the December quarter, but in this quarter, we saw an increase in that and it does bring a bit of lower margins. And then, I'll also acknowledge that, as Steve highlighted, we did decide to make an investment in China, so to speak. In other words, the transaction that we decided to do there did bring our margins down slightly on average. We consider this as a very important space for us, that while we had been there, this was a significant marquee win for us. And we think it will be a nice platform to grow inside that region. So it brought our margins down slightly. And so what you're seeing us in that 38%. Meanwhile, I'll also acknowledge that we have opportunity in the cost area around our infrastructure and consumable space. And we continue to integrate and with the latest acquisitions, we think we will continue to refine that area. And that's why we have confidence with the business overall we think some growth areas that you're starting to see ramp as well as some of the improvements that we see will offset the genomics mix and get us above the 40% and beyond.

Got it. And then one last question on the guidance for the December quarter. You are guiding revenues up, but EPS significantly down. So can you just help us understand what is the -- how do you bridge the EPS?

Yes, that's a good question. So just if you refer back to the P&L chart, what you'll see is that we do have some impact in the nonoperating income. So our tax rate for this past quarter was about 13%. And that was a little lower than over the year as we had some discrete levels in this past quarter. But in the quarter coming, we refreshed to the following year. Our guidance on the 2018 year would put us again in the 15% to 20% range expectation. We have about 18% factored in for the quarter and for the year currently. But it will range between 15% to 20%. So that takes us down a little bit. And then we also have lower joint venture income as you saw it soften this past quarter. We are expecting a little more softening in the coming quarter. And then finally, and this is I think important for everyone to recognize, which I'd hit is the debt does add some weight to our EPS. In other words, about $0.03 in the quarter is the impact of the interest expense. So if you were to factor just the interest expense in which is a change to our model really, at least how everybody else is viewing it, you would see -- you would look for about $0.03 adjustment, the tax and joint venture earnings make up the difference.

Our next question comes from the line of William March with Janney Montgomery Scott.

So first question, could you maybe just talk about the 4titude acquisition, and specifically, it seems like their products are a little bit more geared towards lab consumables as opposed to what we would think about Brooks' sample storage solutions. So just kind of the strategy behind that? And then maybe how does this acquisition open up additional opportunities for M&A may be in the space adjacent to where you guys have traditionally played?

Sure. Bill. And this is -- it's an interesting one for us because without the capabilities that we've acquired in the last couple of years, it would be a little tougher fit. We did find in our -- as we canvassed the area around the cold-chain, a couple of things. One, as you know in the BioStorage alliance that we have with RUCDR, there is a high volume of both storage and in the use of PCR plates there for analysis. And ultimately, we have customers now storing PCR-formatted samples in cold storage. So we think it's a really good fit. And that we looked at the amount of genomic analysis that's accelerating that this format is much more prevalent, and it happens to be mainstream in some of our customers and on the analysis side of our business. So we think it's a really good add from that standpoint. And the integration by the way is going extremely well. One of the things that I'll note is that it allows us also to expand and put something else in the consumables case for the sales people who are out selling the FluidX capability. So we can leverage an infrastructure that we built the sales organization, and we're actually contacting the same customers who buy other services and the infrastructure storage from us. So, so far really good fit. We like the business a great deal. We learn a lot more about it as we go. But we anticipate good synergies on the sales side, and certainly from the analysis and storage side as well.

Got it. On the -- and then on the B3C, could you maybe just talk about, I guess, 2 questions, one, with the recent CAR-T approvals by the FDA, has -- have you seen an increase in contact with customers? And then secondly, just could you maybe just talk about how that infrastructure would fit into a company if they had a CAR-T therapy approved and how many freezers would they need from you guys? Just kind of how that opportunity looks over the next couple of years?

Sure. I can answer the first part with a little more clarity than the second part. Because of the CAR-T and the way that this -- these technologies are advancing, the customers are almost self-declaring a little bit easier. So they are pretty easy to find and they are numerous, as you can imagine. And so that's the bulk of the penetration. I think, one of the things that Dusty has done is, he is focused. Rather we went out early adopters early on, at a broad audience were finding that the cryo is really focused on very specifically some of this immunotherapy. So that's the focus area for the company. We're are finding a good match there. And that's why when we talk about 30 different sites with the B3C from an adoption standpoint, that's gaining some momentum. And we feel really good about that. In terms of the workflow, it won't be simply an automated store, but it will be how do we continue to protect the samples below the glass transition temperature from storage through transport to ultimately where the sample would be used. We think it's an integral part. This will be a long process to get this qualified into a process ultimately that could be used for clinical trial. But you can imagine that if a B3 system stored 10,000 samples, you can do arithmetic pretty quickly to understand that, that would drive a very significant market opportunity for us. So how those would be distributed? Would they be at clinics, will they at a pharmacy, would they be only in a central location and ultimately shipped out is yet to be determined, but again, I can tell you that a lot of activity going on, is to how we take some of these technologies and expand the market. But we're working on the workflow, this is front and center right now.

Great. And then one last one, just from -- on the semi side of the business, kind of what gave you the confidence after you had updated fiscal year '19 guidance a few months ago on the semi side of things and to raise it only a couple of months later? What are you seeing either from end markets or customers that gives you the confidence to raise those numbers so quickly?

Yes, let me start on that one. So you said a couple of months later, but we've been reiterating the guidance, but that guidance, that model was established in the summer of '16. And we have been holding on to that. And as we've said in the past, we do -- we don't quite fully subscribe to the fact that the semi market is -- has shed all of the cyclical nature. We suspect that we're vulnerable to cycles. But in light of the confidence that we're seeing in the industry and among our largest customers, talking in the indications of the 2018, and likely into 2019. And where we're seeing specific investments in semi that would suggest that the CapEx equipment market is running above $40 billion on a fairly consistent basis. Then we decided to reflect this into the model. And we've been facing the question for a while. Well, you must be thinking semi is flat or down based on your model. And that's not the case. We believe that we are in a market that grows better than GDP. We've seen, in over the last 2 years, much better than that because of the change in the capital intensity in the market. And it appears to us that, that capital intensity does have a good case for sustaining itself going forward. And with all of that said, we caution our investors that we do think that there's still a cyclical nature at these levels. So that's why we still on the principle of our model show a modest cycle. When we say flat to 5% market, and for us 2% to 8% revenue growth, we think that's pretty modest. It could be bigger, it could be lower. And the real purpose of our 2019 model is to show you that if we think this is right down the middle of the road in semi, then what does the rest of our transformation continue to do for our earnings potential? And we think that's pretty significant. And we think that's meaningful for the investor. And we have gained a little more confidence where the semi markets rounded out.

Our next question comes from the line of Edwin Mok with Needham & Company.

First, I guess want to speak -- just to ask you little bit around the December quarter guidance. It sounds like from the commentary that semi -- you expect semi to be flat, and -- but I think the cost metrics aren't pretty bullish? Is that upside for that? And then on the Life Science side, you did the 4titude acquisition, how much did that contribute for -- to the December quarter revenue?

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Yes. So Edwin, this is Steve. On the semi side, with the exception of the Contamination Control business, which is, as you know, really heavily foundry-driven. We have pretty high volume. We anticipate that business to come back as probably in the -- toward the middle of calendar 2018. But remainder of the semi business, we forecast to be up. So we're very positive on all parts of the business, but the increase in the remainder -- in the bulk of the semi business, it will be tempered a little bit by another decrease in the Contamination Control. But overall, semi will be up in the December quarter. So maybe we weren't clear in the prepared remarks from that standpoint.

And then on the 4titude, benefit or effect on the guidance?

Yes, so let me put just a little more just context on both sides. So we see that there is possibility that semi side could be approximately flat, but it could be down slightly. And we're managing -- we always manage. So what customer takes is there's always a range around that. And then on the Life Science side, I gave you a number range of $47 million to $49 million. That's up $3 million to $5 million. And we do factor in a little bit of growth in 4titude. But when we had shared that this past 12 months, we saw about $14 million of revenue. So that would imply to you $3.5 million on a run rate. But frankly, we don't factor all of that in, in the first quarter of an acquisition. I never count on a full quarter of revenue, the first quarter I own a business. Because it's just logical that previous owners flushed the pipeline. So we have a little modest growth in there on 4titude. We have -- And with some range on it. And then we have some organic expansion. And recall, we had a full 3 months of PBMMI. So that don't get any incremental benefit from the $44 million just on a quarter-to-quarter basis. But we're really solid on the likelihood of hitting that range of $47 million to $49 million.

Okay. That's helpful. And then I guess, since we are on, sort of, Life Sciences, I have a question on the consumable business. I think, you mentioned on a call, around $7 million this quarter and that seemed decent growth. Have you started to see the synergy benefit from the customer, because they have bought using your cold store and your position in market, have you started to see synergy benefits from -- either from your store business or from your BioStorage business that's driving the consumer growth?

Yes. Edwin, indeed, we see pretty significant synergy benefits. As a matter of fact, there's a new configuration of Acoustic II, that's driving a meaningful part of our storage business. So from an order standpoint in future, we're in a really strong position. Also, we have 2 large store customers who are customers of the 4titude PCR plates. And they store the PCR plates in our store. So we're seeing it as an overwhelming transformation for us to be able to go and have the conversation with customers on all aspects of the portfolio. We're especially seeing it on the order side for consumables. And we anticipate in 2018 that will -- that the revenue lift will come as a result of the synergies that we have.

Yes, definitely, that seems like there's a good driver going forward. Last question I have on the margin side, very strong this quarter, and if I look at your target model, seems like you're frankly quite conservative in terms of your margin outlook. For example, on gross margin side, you're [indiscernible trending at that and you already guided for your Life Science gross margin to go higher. And then similarly on the operating margin side, I think historically, you said the Life Science operating margin should be trending above corporate average. Are you guys trying to be conservative there can you kind of break that down for us a little bit?

Yes. So it's a really fair question because I put on the page about 41%. And I told you that the semi business would be about 41%, and that the Life Sciences would be 42% to 44%. At the low end of the range, it'll still be above 41%. I should say on this, low end of that Life Science range, it will average about 41%. And at the high end, it could be a little bit higher in the mix of the business. Why at 41% on the semi when we just struck 42%? We did have some favorable mix as I highlighted in my prepared remarks in the quarter. We're not shying away from taking this thing upward. In fact, our segment leader Dave Jarzynka, is very focused on driving margin optimization. And we've got continued actions on cost as well as value of the product. But we're also cautious on a window like this of 2 years that we've not been in this territory before. We're quite pleased to be above 40%, and over the year, I'm confident that we'll be above that, further is coming, assuming the revenue in the market holds for us. But it will vary, some on mix, some on the strength of the market and the cycle. So you're fair. We're being a little cautious on the semi. It's a sustained model right now on the margins from where we're operating. But still significant improvement from the annual average we just had over the last 4 quarters.

Okay, great. Just quickly follow-up on the operating margin side, the target for 18%, do you expect Life Science to be above or below that? Or any kind of way to think about Life Sciences and semi versus the target?

Yes, it's a good question. And I'll take that on. So in our 2019, a year ago, we told you that 2019 might be the year that Life Science overcome semi. At the time we were calling for a 15% semi objective, and Life Sciences a bit higher. Right now, we've adjusted our perspective on this. We think semi is running above 16% already on a consistent basis. So we think that we'll continue to support that on the semi side assuming we're in the range of revenue. On the Life Sciences, we backed off a little bit on that. In other words, do we think we get this 15%, yes, we expect so. But in our model -- but I will tell you that as we come through this year, we've seen opportunities to make investment to grow profitably, to expand the foundation for future profitable growth with a lot of confidence. And we're seeing that opportunity continue. So our commitment in this model is that we will sustain and improve the operating margins each year. But I don't think '19 will be the year likely that we crossover, absent a significant change in the acquisitions that we do going forward.

Our next question comes from the line of Patrick Ho with Stifel.

This is Brian Chin, calling in for Patrick. First question, I just -- going back to the semiconductor business. Just curious, I think, the business is tracking around 20% growth year-on-year. If you excluded those headwinds you alluded to, the licensing revenue and the wind-down of the JV, just curious what would that semi revenue growth had been fiscal year-over-fiscal year?

I think it probably would have well and above 3 to 4 points of growth. In other words, I'm estimating it was approximately $20 million in the previous year. And if you would have added that back, I'm estimating, I'll -- we'll double check the arithmetic here. But in round numbers, it would have had about 4 point drag on the revenue, I believe.

Okay. That's helpful. I guess, also, when you talk about, perhaps there can be some volatility, variability in the semi business, but as you alluded to, relative to 2 or 3 years back and certainly 6 or 7 years ago, the business is much stronger, it looks like it's much more sustainable, and even if there's variability, it's going to be up at much higher level. Just curious, to what extent that really is adjusting your strategy in the Life Sciences business? I don't think it would kind of, put you more towards a foster being even more aggressive, maybe the term loan agreement is evidence of this. I'm just hoping you could comment a little bit more on that?

Yes, I think you have it right. We are -- we'd rather deliver and take action and let you know on some of these things, but we see tremendous growth potential. Right now we have a new organization bidding into what we see as just a global expansion. We have systems this year we signed off in Sweden, in Qatar, in Australia, in Korea, in Japan. We have a really strong global footprint. And we are stretching the organization pretty hard. We're adding capability as quickly as we can. As you surmise, obviously, the debt we took on positions us really well to continue to expand. And our ambitions are for pretty significant growth. And we'll signal to you as we get closer, but as we take on more transactions as Lindon mentioned, it's one of the reasons we're updating model right now as we transformed the business pretty significantly. And I would anticipate a year from now, we'll have more conversations about new models, especially around the Life Sciences side. So Brian, you're exactly right. We are positioned to continue to take advantage of what's a tremendous opportunity here.

And Brian, I will come back. I already got corrected in the room. The revenue in the previous year related to the license income as well as the distribution agreement that we exited was about a 6 point headwind on the growth rate.

Okay, that's helpful. Maybe one last quick thing, going to the target model that you updated today. In the revenue at the midpoint I think up something like 8%, relative to the midpoint on the prior model from over a year ago. I did notice the high-end EPS range, the low end increased, the high end of the range stayed the same and, sort of, midpoint increased, just curious why the high end of the EPS range did not change?

So Brian, we're a year further along into the model. And so we take a sharpener pencil. You'll see the ranges on all lines, I think, narrow just a bit. And this is where we are estimating it today. We don't -- I want to emphasize another point as we pulled it in about $0.10 to the year for the interest expense, and so that wasn't in the previous. So you would see the high end $0.10 higher if we didn't have carried the debt. And as I highlight, as we expect to put that money to use, but we haven't factored in the benefits, it would -- it wouldn't be unlikely that we could add a certainly EBITDA and non-GAAP EPS to the model to that range.

(Operator Instructions) Our next question comes from the line of Amanda Scarnati with Citi.

Just a question on the new agreement in China and the investments that are required there. Are these sort of onetime investments that have to happen to kind of grow the business overall in China? Or as you continue to gain more market share and more companies within China, will you see these investments kind of increasing as you go along?

Yes, we think this is one very specifically for a target that we feel is really important. There are a lot of opportunities we have in China that we made, what we think, is a really solid packaging agreement with a customer to get ourselves established firmly. So we think it's onetime. We think the next expansion opportunities that come as a result will be more consistent, steady business. But we're making some investments, both from a configuration standpoint and by the sheer volume that we want to make sure that we get it in secure. So it's just going to be lower margin at the first pop and we think it'll reestablish as soon as we get to the next opportunities that exist there. And it will be the reference for us in China. So we think it's got a lot of value from that standpoint as well.

So are you giving some sort of like pricing concessions in the investment package just you're giving them? Or is this adding infrastructure for them? Could you talk a little bit more about what these investments are?

Yes, I can't talk too much but in our ability to get the storage and we may get some configuration changes, if you will. And so that's a good start for us happens on the first time on these tools, but it would be a good thing for us to move going forward.

Okay. And then as you look at the semi's business going forward through 2019, what product line do you look at as kind of the greatest growth potential for Brooks? Are there any product areas that you're a little bit concerned about going through 2019?

For us, as long as the vacuum processes continue to dominate, that's really important. We see the Contamination Control as extremely strong. Amanda, if there is a question mark, it's, will we go beyond the foundries as very significant consumers of Contamination Control, and will that fan out into some of the memory and some of the other logic at the same kinds of levels. That's probably an upside opportunity more than anything. But that's an open question that we have. And we're investing pretty significantly in the advanced packaging. So we see those 3 vectors, the vacuum, automation, the Contamination Control and the advance packaging continuing, certainly in the time frame after 2020. We do pay attention to the discontinuity that could happen at EUV but I'll remind you, we have an EUV business also that's related to the reticle management and the pods and pod cleaning. So even if that diminishes slightly the amount of deposition and etch because you can do a single pattern for example to -- we can reduce the number of events logic to form a transistor. We have an additional piece of business we think that will come pretty significantly around EUV. So we think we're positioned properly. We do spend all our time with our customers on the next generation of capabilities, but as long as the deposition and etch continues to grow like it does, we think we're positioned really well.

Our next question comes from the line of Craig Ellis with B. Riley FBR.

Congratulations on stellar fiscal '17 execution across both businesses. I wanted to start following up with your detailed comments on the semi business, Steve. You outlined the strength that you saw across the 4 parts of that business in fiscal '17. Not looking for guidance here, but can you just talk about growth gives and takes as you look out over 2018 across vacuum automation, advanced packaging, CCS and cryo vac?

Sure. So Craig, interesting -- it's an interesting pattern through the year. A lot of people saw growth. And one thing that's sort of curious one for us, in the vacuum automation we saw 4 quarters almost at the same level every quarter. When we add the vacuum robots and the vacuum systems, it was strong from the get go. So from Q1 through Q4, and we anticipate that, that's -- then approximately that level is what we would anticipate at least starting '18. So that's really healthy and we think that's exactly a measure of the deposition and etch strength. And as more memory, as 3D memory gets added, we anticipate that, that business will continue to be strong. On the advanced packaging, this is up and down a little bit more. But where the TSMC, the first of the info lines went in, we had a very significant presence there because we gained shared with the participants. And we think that the next line that comes will drive similar amounts of business. The advantage we think that we have is because the same suppliers of equipment who use our capabilities are going to supply the OSAT, and some of the device makers who have their own advanced packaging as that capability ramps up beyond TSMC, we anticipate that will also drive the business. We have less visibility there frankly. But we think that's just generally the trend. On the Contamination Control, again, when foundries -- advance foundries began to spend that will be strong. We're watching very carefully on the ability to penetrate memory. But we -- right now, if you're going to get us to take a look at it, a strong $80 million year might look similar in 2018 for right now just to give you a sense. And as I mentioned on the cryo, chiller cryopump side, strong end to Q4 and Q1 feels similar from a -- how we're going to start the fiscal Q1 2018.

That's great. And then the next question I have is regarding Life Sciences. I think the question I get most from investors now is regarding the M&A strategy, broadly and specifically, there. So what I was hoping you could do Steve is, one, can you just step back and from a higher level, given the transaction history of the company, talk about where you are in terms of your comfort with deals from a size and pacing standpoint, given that we just had 3 deals? And relative to the 3 Life Sciences initiatives that you outlined on the call, should we think about M&A targeted at those initiatives? Or is the list of priorities somewhat different in those 3 initiatives going forward?

Sure. So right now it remains different. And I'll explain here. We have a complete cold-chain, I think that's a one of the things we tried to emphasize from an acquisition of sample standpoint, formatting, transport, storage, storage services and the informatics. It's a very complete portfolio. And we have an analysis capability now as a result of the BioStorage alliance we have with RUCDR, so we really have the ability to manage the samples from a cold-chain standpoint. One of the things that the cryo brings to us is the ability to extend the cold-chain to another temperature range and participate with a whole different set of applications really related to immunotherapy. So we have a foundation of the business. But applying some of that capability at a different temperature range opens up a next level of opportunity for us. So most of what we have is there. Because it's a new field, it's the development of products that were -- that we're bringing to market that allow us to participate. And so you may see some acquisitions there, but mostly that will be organic. And as we always mentioned, it's a very fragmented space. And the advantages that accrue to us as being someone who can provide a complete solution. We are looking at always like at companies like PBMMI that adds more samples into a model that already exist, and infrastructure that already exist. So as there are things that we can do from a consolidation standpoint, where a smaller companies fit our model and we could drive both synergies and a little bit more reach, we'll be looking at those too. All that said, there are some things that we'll also consider from a transformative standpoint. And we think we have the capacity if the -- an appropriate accretive opportunity came that we would consider a transformative deal. But right now, the kinds of things that you'll see us doing are more along the consolidation of the kinds of capabilities we have. But if the informatics platform could be advanced by a few more capabilities, we'd add in rather than develop, we will do that. And if it doesn't makes sense, we have the development capability to do that on our own.

That's real helpful. And then the last question is to Lindon. Lindon, as I look at the target model in your comments around the changes there too. It seems like there was no one thing that drove the update on either the Life Sciences or the semi side, but it was an update driven by developments there and then just change in some of the income statement items like interest expense. Is that there? Or was there really a particular driver as you thought about updating the model on this call versus a quarter from now or 3 months ago?

It really reflects the combination of everything. Because what we've seen is the semi spaces change significantly in terms of the level of CapEx in the market and our revenue sustainability, as well as the number of acquisitions we've added to the Life Sciences. So if I stick with the old model, I keep bridging people back with these differences and changes. And we just felt it was time. Obviously, factoring in the interest expense I think it's important for people to understand what's happening. So we bring some clarity on that, Craig. So I think it's a combination of all of these. And I would emphasize that the model, while it carries the cost of the debt, is not yet carrying the benefit of future acquisitions. We have a nice pipeline in front of us. So we expect to fill that in. But it's a combination of all those factors that drove the update.

And there are no further questions. Mr. Robertson, I will turn the call back to you for any closing remarks.

Okay. Thank you, Nelson, and thank you, everyone, for your time spent with us. We have what we believe is a really solid progress, an outstanding year of performance. We had an outlook that takes us up a bit in the revenue and we'll hold our earnings approximately similar when considering the interest cost. And we're pleased to move forward on that basis, and also emphasize the outlook that we have as we build the model out. You've seen the progress over the past year. We see there's much more progress to be made the coming 2018 fiscal year, going into 2019. And we have a lot of confidence where we're headed. And we thank you for your time and considerations of Brooks Automation. So thank you, and we wish everyone the best for the holiday season ahead.

Thank you, 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.