Azenta Inc (AZTA) 2005 Q3 法說會逐字稿

Thanks for holding everyone, and welcome to the Brooks Automation fiscal Q3 earnings conference call. Just a reminder that the call is being recorded, and a replay of the call will be available starting at 7:15 PM Central time on August 1st through midnight Central time on August 7. The number for the replay is an area code 719-457-0820.

Now I would like to turn the call over to Mark Chung, Director of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and welcome to Brooks Automation's conference call to discuss the results of the third quarter of fiscal year 2005 ended June 30, 2005. The press release announcing the results of the quarter was sent out this afternoon at approximately 4:00 PM Eastern time. You may obtain a copy of the press release from our Investor Relations website at investors.Brooks.com, or you may call the Investor Relations Department of Brooks Automation to request a copy.

Today giving the prepared statements on behalf of the Company are Bob Woodbury, Chief Financial Officer, and Ed Grady, President and Chief Executive Officer. After the final speaker, we will open up the call for questions. Michael Pippins, Chief Marketing Officer, is also present to help answer questions.

Let me caution you that in the course of today's call we will be making some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are a number of important factors that could cause actual results or events to differ materiality from those indicated by such forward-looking statements. I refer you to the section in our press release titled "Safe Harbor Statement" and the Company's most recent filings with the Securities and Exchange Commission.

In connection with Brooks' proposed acquisition of Helix Technology, Brooks plans to file a registration statement on Form S-4 containing a joint proxy statement prospectus with SEC. We urge you to read the registration statement and any other relevant documents filed with the SEC when they become available because they will contain important information about Brooks, Helix, the proposed transaction and related matters.

Now I will turn the call over to our President and CEO Ed Grady.

Bob is going to go first.

Sorry about that. Bob Woodbury will go first.

Thanks, Mark. By now you have all seen the results of our third fiscal quarter. Revenues finished slightly lighter than our guidance; however, earnings held up reasonably well with GAAP net income for the quarter coming in at 926,000 or $0.02 per share. If consensus reflects amounts before amortization and restructuring, this amounts to $0.06 per share versus a consensus estimate of $0.03 per share.

Orders for the June quarter were 93.9 million comprised of hardware orders, including services of 71.5 million, relatively flat to the 70.2 million from Q2, and software orders were 14.2 million. You may recall last quarter as we gave guidance we anticipated reduced order rates from the software business due to some timing issues.

At that time, we expected orders to be in the $24 to $26 million range. The quarter came in significantly weaker than expected as some targeted orders got pushed out and just a lack of order activity on the software side of the house. We do expect a recovery in the September quarter back to the mid-20s. Backlog at the end of the quarter was 104 million.

Revenue for the period was 113.8 million, slightly better than the low-end of our original guidance range of 115 to 120 and slightly better than our updated revenue guidance. Revenues for our equipment automation segment were 69.4 million, about 2% lower than last quarter. Factory automation hardware revenue was 21.9 million, and software revenues were 22.4 million -- lower than we anticipated principally as a result of the low orders during the quarter.

Our top 10 customers accounted for the 47% revenues, and on a geographic basis, 51% was North America, 16% was Europe and Asia was 33%. The gross margin as a percentage of sales was 35.2%, slightly better than our expectations given the lighter software mix. Margins in the equipment automation segment were 27.2%, down slightly due to mix related to some flat-panel shipments, as well as about half due to the absorption as shipments were down quarter to quarter.

Factory hardware was 26.4%, a significant improvement over the last several quarters, and software finally at 68.8%. Q3 operating expense came in at 36.6 million, slightly better than guidance of 37% as we tightened cost controls during the quarter. R&D was 16.1 million and SG&A of 20.1 million. There were also amortization of intangibles of 737,000.

We had restructuring expense of 928,000 as expected as we recorded additional charges to Jena. The profit from operations for Q3 was a gain of 1.8 million on a GAAP basis to 3.5 million or approximately 3.1% on an ongoing basis. Again, the difference being restructuring and amortization charges.

During the quarter, we had 90,000 in net interest expense and 640,000 of other income. The tax provision was 1.2 million, again primarily related to withholding taxes in foreign jurisdictions.

You will notice on the face of the income statement there is a category called loss from discontinued operations. This relates to our sales group that was in our other segment in previous quarters. The accounting regulations require that when we have completely exited the business, this classification is required. Since we completed all obligations for this business during the quarter, we have shown the $357,000 charge under the appropriate classifications in our financials. Again, the GAAP net income for the quarter was a profit of 926,000 or a profit of $0.02 per share.

Included in our results were restructuring charges of 928,000 and 737,000 of amortization expense. The total of these charges accounts for $0.04 per share. Again, as many of you measure our performance before these charges, this equates to $0.06 per share.

Turning to the balance sheet, cash, cash equivalents and marketable securities at the end of the quarter were relatively flat about 350 million down just slightly. DSOs were 73 days, up over where we have been. Part of this is timing of collections, as well as higher revenues later in the quarter.

I am still very comfortable in this area and look for continued improvement this quarter.

On the positive side of working capital, inventories decreased by $6 million to 57.7 million as a result of additional focus in this area. There has been a major internal effort to improve our inventory turns. I do expect reductions again this quarter, and we should see some stabilization once we reach about $55 million in inventory levels.

Lastly, depreciation was 2.8 million and CapEx about 3.3 million.

For Q4 we expect orders to be flat to up 5% composed of a slightly lighter order picture in OEM hardware and an improvement in software. We expect revenues to be approximately 100 to 105 million. Gross margins should be 33.5 to 34.5. OpEx relatively flat. Taxes will be about 1.2 million. We will continue to guide on a GAAP basis, and to that end, GAAP EPS should be a range of a loss from $0.07 per share to $0.13 per share. Again, this does include amortization of 740,000 and restructuring of approximately 650,000 for total adjustments of about $0.03 per share.

On an apples-to-apples basis, this would compare to consensus numbers, excluding these charges, to a loss of $0.04 to $0.10 per share.

As you all know, as our previous announcement at the end of the quarter, our interest in acquiring Helix Technology. As a Company, we are very excited about this transaction as it will help us to continue on our mission to be a leader in our industry. This strength in the vacuum market will further enhance our strategic goals to capture more of the systems outsourcing business from the OEMs, as well as utilize their strength in the service offerings to help us become a leader in this area. I strongly believe this will help stabilize Brooks throughout the cycles and overall strengthen our Company.

Now I will turn it over to Ed.

Thanks, Bob. Welcome and thank you for your interest in Brooks. Our June quarter could best be described as a continuing step forward for us, coupled with some disappointment but nothing that diminishes in any way our determination to achieve our growth and profitability goals. The most recent public disclosures by several keys semiconductor capital equipment companies indicate shipments ranging from down 2% to down 22% in the September quarter. At the same time, September fab utilization is increasing with most recent figures in excess of 85%, particularly on the leading-edge production.

Just to set the tone, there remains our view that the semiconductor automation business, as we see it evolving, will emerge as one of the fastest-growing secular verticals in the semiconductor capital equipment space. We anticipate that the drivers of the expansion in this sector will include growth in tool automation driven by captive to merchant outsourcing, a move from subsystem modules to fully integrated systems and the demand to improve efficiency in the semiconductor fab.

Outsourcing continues to move forward at about a 4% incremental annual rate. However, there are indications that this trend may accelerate, although any move in that direction will probably be highly dependent on the timing of the next upturn. Slow periods drive cost efficiency changes in the business model at the semiconductor tool manufacturers and also focuses their efforts on the next generation platforms providing greater design-in opportunities. These opportunities tend to turn into volume business three to six quarters after the design-in win activity.

Entering new markets as we are in the Enterprise Software Application space is a slow missionary sale and requires development of domain expertise. We continue to make good progress; however, as the results show, this transition to a new custom base for software is slower than expected, and the predicted slowdown in fab construction has adversely affected near-term opportunities in semiconductor for our software license business.

Let me focus on our Q3 results. Our fiscal third-quarter revenue mix was weighted towards our tool automation business accounting for 61% of revenues for the quarter and staying relatively flat compared to the prior quarter. For our long leadtime business, the factory hardware and factory software segments, the lack of significant new fab activity resulted in sequential declines in bookings and revenue. This reduced level of activity is consistent with what our major OEM customers are reporting and also consistent with our 300 millimeter fab database, which shows a bottoming of equipment shipments in the September quarter before projects increase in the December quarter and March quarters of 2006. We clearly see opportunities in Lithoautomation and with current customer AMHS expansion or retrofits. We believe our orders will begin to rebound this quarter indicating an improving environment in December.

Fabs are reporting tightening capacity and increased investment in the leading-edge technologies which could drive meaningful CapEx spending as we exit 2005. This current period of softness, therefore, is not unexpected, and as such Brooks is staying focused on achieving our near-term operational goals, as well as improving our position in the market so that we can find strong leverage as the industry recovers.

From our operations, Bob already talked about our cost containment efforts during the quarter that resulted in our ability to keep operating expenses at the $36.6 million level, better than our guidance entering the quarter even with incremental spending to support regulatory compliance activities.

We made good progress towards converting our operations in Jena, Germany from a manufacturing center to a final integration and test center, which will allow us to transition certain lower margin products to lower-cost manufacturing centers in Asia.

We also strengthened our organization in Asia with the addition of two outstanding senior executives -- Mr. Hoon-Shin to run Korea and Japan and Mr. Ken Leung to run greater China and Southeast Asia.

Hoon comes to Brooks from KLA Tencor where he was extremely successful as the President of KLA Tencor Korea and prior to that a member of -- a key executive in Samsung. Ken ran Assist Taiwan in China for 15 years before leaving them about a year ago, being credited with much of their 200 millimeter Smith success in that region. We are very pleased to have these industry veterans provide leadership for Brooks in Asia where we will be concentrating on improving customer support and increasing our business presence with local content and rapid response capability.

From the market perspective, we made good progress during the quarter with 12 design-in wins in the OEM business. We continue to work with large OEMs to strengthen our relationships and position Brooks as the outsourcing partner for automation. The new products that we recently introduced at SEMICON West in July were exceptionally well received, particularly our new generation OEM tool automation products. We completed the first shipments of our new Marathon 2 Vacuum System and our MagnaTran Radius Vacuum Transport Robot to key customers, one in Asia and one in North America. These products have progressed beyond the proof of concept phase and were shipped to these customers for their production systems, an important milestone for Brooks.

At SEMICON West we displayed our new Radius Vacuum Robot and Marathon 2 Compact Vacuum Systems. We also previewed our new Atmospheric offering, the JET equipment front end module and two different Atmospheric razor arm robots.

Additionally our new controls were also demonstrated at SEMICON West to selected customers generating a lot of interest. We believe this family of new products is highly competitive from a performance, reliability and cost perspective.

In software during the quarter we announced the certification of Brooks SAP Integration Gateway that will enable interoperability of Brooks real-time manufacturing software with SAP's business solution. This collaboration with SAP will help provide discrete manufacturers a way to resolve the difficult issue of matching resource allocation in their production environments with customer order mix. We continue to make good progress partnering with Enterprise application providers to facilitate our crossover from semiconductor industry-centric software group to a multiple industry solution provider.

In our outlook the business environment remains challenging; however, we are encouraged by signs that we have reached a trough in the September quarter and that the December quarter should see the start of an industry recovery. Barring any unforeseen major events, we are now tracking 28 projects for a total -- 28 projects total for calendar year 2005 with 12 new and 16 expansions. This is up from 26 projects at the beginning of the year. This number is still quite dynamic as chipmakers take advantage of short leadtimes.

With the very successful route of meetings at SEMICON West in mid-July generating significant new interest in our next generation products both in vacuum and Atmospheric tool automation, the team is energized. Brooks is enthusiastic about the opportunities that OEM outsourcing continues to present, especially as we roll out our new generation of products the remainder of this year and next year -- the largest such product launch in Brooks history with 14 new products introduced or previewed at SEMICON West this year.

This is a culmination of the investments in retooling our complete OEM tool automation suite over the past two years. It was most rewarding to me and our team as we previewed our new products and to hear the universal and overwhelming wow response from our customers. By continuing to focus our efforts on gross margin improvement through implementation of lean manufacturing, exercising our global supply chain and aggressive deployment of the new products, we will achieve our financial model. Through operational excellence and strong marketshare, we continue to focus on bringing value to our shareholders, customers and employees.

During the quarter we announced the strategic combination of Brooks with Helix Technology. As many of you already know, Brooks announced on July 11 the signing of the definitive agreement to acquire Helix Technology in a stock for stock exchange. We are very excited about this transaction because we believe it will create a premier subsystem supplier that together is better positioned to pursue the OEM outsourcing business than separately as stand-alone companies. The combination will accelerate our ability to improve global customer support by incorporating the Helix service strategy and infrastructure. We believe this strategic combination creates strong value for customers, employees and stockholders of both companies. We expect the transaction closing will be in the fourth quarter of this calendar year.

Now let me open up the call for some questions from our audience.

(OPERATOR INSTRUCTIONS). Mark Fitzgerald, Bank of America.

I was just curious in terms of the outlook here on the cost operating expenses here. It looks like you're running them flat right now. Do you plan to do that given your outlook for the next couple of quarters?

Well, the outlook, Mark, I think is you know we are saying is for Q4 is all we have guided to. If in Q4 we are going to have -- again, I think I guided flat to about the $36.5 million range -- that is spending up a little bit actually with all the work we are doing with Sarbanes. If we see this going on a prolonged period you know beyond the December range, we will address cost structure, but I think for the September quarter we are going to try to hang in where we are, and what we're actually expecting is many (inaudible) in the industry that there appears to be a potential upturn coming in the December to March quarter. So we don't want to hit the infrastructure yet.

We also do get some cost relief as well as the Jena piece will actually come off all of our costs by the end of September. So you will see some improvement in the December quarter just with that loan.

Okay. Just to kind of get a lay of the land to what happened here, coming off the March quarter, you were kind of optimistic that you had turned up in the second half. Is this just a timing issue from your view that is kind of getting pushed from the September quarter into the December quarter?

Yes, I think so. I think we saw early that the number of new projects in our database was bottoming out in the September quarter. So we had some indication early on that this was the direction the industry was going, but it is a little bit more severe than we had anticipated.

And is there anything that slipped near-term that you can see or that accounts for the shortfall here?

Not really. I think it is just a timing issue of order placement for the next products.

Ben Pang, Prudential.

A couple of questions. You mentioned that I guess when the industry goes into a little bit of a lull period that is the best time to get design wins. Do you expect to see that type of activity increase over the next couple of quarters? I mean they are going into like you said a trough type of a shipment mode. What kind of acceleration do you see in your tool automation customers outsourcing plans right now?

Actually we don't see a big change in the rate at which people are outsourcing. What we do see and have seen this quarter and are seeing in this next quarter a tremendous amount of activity in the new products that we introduced at Semicon in terms of getting those designed in.

Our biggest concern is that if the industry does turn up rapidly that it may slow that effort down. But clearly we see the September and December quarters even into the March quarter as high design-in win quarters.

Okay. And you did announce you got some new executives for your Asia operation, and also I guess you promoted personnel in Europe. What is going on with your regional offices? Is there going to be a significant change in the way you do business in Asia? Are you looking for new customers in Asia?

Well, the answer is certainly yes. We feel -- (multiple speakers)

On the automation side?

Well, on the tool automation side, we have our office in Korea that is building all of our flat-panel products. We're expanding that office to support a very significant increase in the Korean infrastructure. We're making some moves in Japan to try to improve our support with the local Japanese customers, so we are heavily focused in Asia. We are heavily focused in China as well. Part of what Ken Leung is going to do is focus our efforts in those companies that are building equipment in China.

So I think our number one focus, though, with the new Regional Presidents is to support our existing customers in those global regions. They are shipping more products into the Asian region to support the number of new fabs, and as we see Brooks evolving to become a better support infrastructure for those OEMs that are shipping products out of the United States into those regions, that is our big push here is to make sure we support our products as they are shipped to our U.S. customers and then transshipped into Asia and also to support an emerging concept called Merge-In-Transit where we actually produce products locally, and we Merge-In-Transit with the OEMs process chambers to reduce cost.

Jay Deahna, J.P. Morgan.

Ed, I was wondering if you could give me a little more detail on what gives you the confidence level that things are going to turn in the December quarter? And does it look like it is going to be an up quarter sequentially for both orders and shipments for OEM products?

The December quarter looks -- the big reason that we believe it is turning up is based on the fab database. It has been fairly accurate over the past several years, and if we look at the number of new expansion projects coming up in the December quarter, it is an increase over the September quarter, and then if you go into the March quarter, it actually shows an increase over the December quarter. So that is the leading indicator we have probably more than anything else.

Is that a snowplow effect in your forecasting, or is there something that leads you to believe if there is a higher degree of confidence, it is going to happen? Do you kind of coordinate that with the specific forecast that you're getting from your equipment OEM customers to see if they are feeling the same way about it based on what their customers are telling them?

I would say generally it is not a snowplow effect. I would say generally we are seeing strength from inputs were getting from our OEM customers. We talk to them on a pretty routine basis, and I think as I have said in my remarks there are forecasts of the September quarter being down anywhere from 2% to 22% in shipments, which directly relates to the Brooks products shipped. I would expect that the shipments in the December quarter based on what we are hearing will probably improve pretty much across the base of our customers. Michael, did you want to add something?

I think I would reiterate the way we track these projects has been consistent and I think relatively accurate. You know for a long time we called September has being the bottom, and that is what we still believe.

Two or three weeks ago we did see on numerous product lines a shift in the order rate, and this is not necessarily in absolutely every product line, but we do see evidence that orders have bottomed, and we do start to see an upward trend. The magnitude of it is a little hard to tell because, as we said before, we think the March quarter looks very very promising with improvement in December. But for most of our product lines, we have seen the change in the order rate change upward.

So you're expecting turns business in the fourth quarter for OEM products it sounds like?

Well, we always have that. It depends on the product itself. Clearly simple modules like load ports have a different leadtime as vacuum systems or Atmospheric systems. And so we do absolutely have a range even on the OEM side.

David Duley, Merriman.

A couple of questions. The MagnaTran robot that you're shipping to this new OEM, what is the application there?

CVD.

And will we be seeing other applications join the party here? Like PBD or Etch?

The product is certainly designed to perform in all of those applications, so we certainly hope the answer is yes.

Okay. And does this particular OEM have a large presence in any of those three markets?

Well, I think the answer to that is the product is obviously targeted at not just one particular customer, but I think without going too deep on this, clearly the answer is we are targeting big guys and big guys with broad market positions.

The other thing that I think you should not overlook in the press release and in Ed's comments is not only have we shipped our new vacuum robot, but we have now shipped vacuum systems as well in particular to Asia. So the new product launch of a new family of vacuum robots, as well as a family of vacuum systems, one of which we had on the floor at SEMICON West, is being quite well-received.

I guess the other comment I would make is during the show we had an off-site demo facility where we showed 16 different customers 25 different groups the new Atmospheric product. And based on that, we have commitments to ship numerous products for evaluation, many of which are to customers that are not currently Brooks customers. So we had I think a very very good preview of the new product, and I think Ed touched on it. It is not only faster than anything else out there, but it has a much lower part count. So we are pretty upbeat about design-in win opportunities here near term.

Okay. Just a couple of questions on gross margins, and then I will turn it over to somebody else. It seemed like margins held in this quarter pretty well given the mix of less software and higher hardware. Can you help us understand what was behind perhaps a little bit better than expected margins?

Well, part of it, David, was driven by factory hardware. We're kind of at the point of purging that backlog with some of the margins that were holding us down. Last quarter we have that sorter order that just went out at a zero gross margin. There is probably only a couple million bucks left in the backlog, so it is getting diminished at this point.

So I think factory hardware held up pretty well, and it is probably more in line with what I would expect to see in the future for that business.

I think I had made a comment, and you can see it from the table, we had on the equipment side, it was actually down a couple points from last quarter. Half of that again is due to absorption where the factory just ran lighter this quarter given where our physical shipments were going out, and then a little bit of mix within OEM as well. But I think it really got propped up by not having the taint of some of those older and bad margin products on the factory hardware side.

Okay. And just the outlook on gross margins in the September quarter, you know given -- I just assumed the software rebounds given that you thought you would pick up one of those pieces of business, and so you are going to have more software in the mix? What impact will that have on the gross margins?

A little bit, but it is probably only going to get it back up into the mid -- we did 22.4 this quarter. We are probably going to be up in the 20 -- probably a little bit lighter than 25, 24 and change in software. So we pick up a little bit there, but again with the output of the factory, we're probably going to pick a little bit more up in absorption. So that is why we kind of guide them down a little bit mainly because of mix.

Okay. When you talk about these new OEM products that you have across the board and you look at your equipment automation gross margins this quarter of 27%, I know the revenue is kind of light, so there is some absorption issues there, but what are target gross margins for this business with these new products?

With new products, it will be up in the mid to clearly into the mid 30s. There is no question. We've got a couple of things right now just in the short-term we are trying to work on. One is our load ports are actually being manufactured, and we will start receiving them from a third-party contractor. We will start receiving them in the December quarter.

We have already got kits sent out to Taiwan. First levels are coming back. But again, we get no cost savings through the September quarter, but in the December quarter we get some of that, and that is on existing product. That is not even the new design.

When we can start to ship the new design products, the margin on even just the load ports, which we ship almost 3000 load ports a year, and the volume there with the new product design, when that cuts into some significant volume, will be substantial. That will gain us itself about 2% just on the gross margin just on a load port basis alone. So it's pretty substantive. But I would say mid 30s, mid 35, 36% range on the tool side once we get new products cut in.

When will the new products account for a majority of the revenue, so you know I guess I am just you know -- (multiple speakers)

You are trying to figure out a model going outward?

Say that again?

You are trying to figure out a model going outward?

Yes, I mean when would the two OEM business have a mid 30% gross margin, and what revenue level would you expect that to happen at?

By the time you cut over, it is probably realistically 12 months from now, by the time you can start getting any kind of volume through the customer base. So say within the next 12 months, probably closer to the back-end of that. And you are probably looking at volume rates that are going to be closer to 80 to 85, high 80s, $88 million for that segment on a quarter level.

Okay. So when we see 80 to 85 million and you have made the crossover to the new products, we should see a mid 30% gross margin from your two OEM side?

Yes.

Timothy Arcuri, Smith Barney.

A couple of things. Number one, on the margins with respect to the tool business, can you tell us how much CDA revenue there was this quarter?

Yes, I've got that right here. CDA for the quarter was about 8.5 million.

Okay. So if I pro forma that out, I get somewhere in the high 20s. I get like 29% roughly for the non-CDA business in terms of gross margin?

Yes.

And if I look back to the early part of 2004, you were doing a lot less -- you were doing significantly less in the tool business and yet margins were higher. And I'm wondering --

The other piece that kicked for the quarter, we had pretty heavy shipments, most just under $7 million in the flat-panel side, which was a kicker. If you look at -- we will ship in the back half of this year almost 11 flat-panel systems, while we shipped in the first half of the year probably four to five.

How should we think about margins there because if you look at the other component suppliers, they are all talking about margins in that business being higher, not lower?

Not for the new systems. We're running in the high 20s.

Okay. How should --?

Probably just on about on the average what the average was for the quarter. It stayed about flat with that.

So that number you just gave out, that 35% gross margin at 85, you know in the out year that includes your projection for flat-panel?

Yes. But again we are going to be very heavy back half of the year. The run-rate we are going to run the back half the last six months of the year will not be -- that is a higher level that we expect to run on a normal level.

Okay. And then also, as I look at the model, it looks like I have comments in my model which may or may not be right, but from kind of six to nine months ago, we were thinking an OpEx rate at 105 million. That was a couple million lower than what you are guiding to. Did I have my notes wrong, or has there been a slight uptick in the orders?

No, I think the uptick as we said -- I spent probably $1 million this quarter on Sarbanes stuff to catch up on audit. Now I have got EY in there and I've got PWC that we finally got the year-end estimates on for what Sarbanes will cost us. But we spent about $1 million this quarter alone on Sarbox, and that will continue into Q4, and then I expect a lot of it to lighten once you get past the year-end side.

Okay. So if you look kind of out to the long-term model at 150 million, you're still thinking kind of 42 to 44 gross and 27 OpEx, something like that?

27% -- you're talking percent?

Yes.

Yes, that is about right.

Steve O'Rourke, Deutsche Bank.

Just a couple of follow-ups here. When you consider the kind of software that you ship often time, does it indicate these push-outs? Does it indicate that you have some customer projects slipping maybe one quarter to the next?

Steve, are you talking about the booking side or the revenue side?

The booking side.

I think that what we experienced this quarter was just a broad-based softness in software et al. driven mostly by no new fabs. I mean that is the biggest thing we saw on the horizon. We expected some other software projects to come in.

But no, this is not a bookings push quarter to quarter. I think Bob said that we expect bookings to return to the mid-20s in this next quarter, low to mid-20s this next quarter. So in the revenue side, however, clearly it is true that two projects pushed from this quarter from a revenue recognition perspective to one of them to this coming quarter and one of them to actually the March quarter.

Okay. Does this indicate that we are seeing some projects slipping then? I mean from quarter to quarter as opposed to year-over-year? Can we interpret this as some incremental weakening in fundamentals here from the customer base?

No, I don't think so. I think it is a one quarter anomaly of the software -- the semiconductor guys just really controlling cost and not investing in new software products.

Okay. Can you give us an indication of the 300 millimeter projects that you are tracking for 2006?

Yes, we're tracking currently 29 projects, 10 new fabs, 19 expansions. Just a little breakout, I won't go into infinite detail. 10 memory, seven foundry and 12 logic.

Fair enough. Thank you.

Jim Covello, Goldman Sachs.

A couple of quick questions. If I'm not mistaken, I believe the commentary up until this quarter had been that the Company was going to try and breakeven even during the course of the downturns to not lose money in any quarter. So if the fab database has been a pretty accurate predictor of what the revenues look like and the original plan was going to be not to lose money, what kind of happened here that we are guiding for such a significant operating loss, especially vis-a-vis where the street was modeling for Q3?

Well, I think we always said, Jim, that we were targeting to be breakeven at the operating income line for the quarter. We have been pretty consistent saying that.

I have also said that we would take OpEx -- we would take it down to 34 to 35 million if we thought that there was a couple of quarters where things would go down. Again, we're seeing one quarter out right now, and for the one quarter I don't believe to take it to $34 to $35 million is prudent at this time, especially when we have a high spend given what we're doing with the Sarbox.

If you look at the guidance, again you can all build your models up, but if you get back to that, the breakeven that we have talked about at the operating side is about 105 million. So if you look at that as a range, I think we're still kind of tracking there.

So relative to the issue of if we are only going to stay here a quarter, I think that makes an awful lot of sense for a business decision. But if the fab database was kind of pointing us in the direction that revenues are going to never get to this level in the first place and the fab database is what is saying that business is going to pick up in the fourth quarter, how do we really have a lot of confidence, and then when and how do you make the decision to go ahead and cut those expenses to get some profitability back in the model?

Well, if I don't see -- if we -- let's go through the September quarter. If we start saying that we don't see an upturn, one is I also -- I have got reduced spending that is going to be kicking in because of reduced Sarbanes costs. That is pretty easy to understand.

The second phase is if Jena starts dropping out, I will probably drop another $1 million in operating expense when I complete the Jena transition. So right there I have lightened my below the lines pretty well. If the order rates still continue, we don't see it change as we get through the September quarter. I don't think I have been bashful in the past about taking more cost out and I will do so. So I think we just have to -- we are going to have to get through the September quarter and see where we go.

I guess we've got a couple of things teed up to do some cost containment on the below the line side, but if topline isn't starting to show above the 105 to 110, we will take additional action.

John Pitzer, Credit Suisse First Boston.

Bob, you had mentioned flat-panel being about 10% of the tool automation business right now going higher in the back half of the calendar year. Where do you think that goes in the September and December quarters?

Well, I don't know about the back half of our fiscal year, John. I see it being flat to up actually even a little bit this quarter, September quarter. And then I think once you get to the December quarter, it will actually start coming back into more normalized levels unless we start seeing some of that stuff turn pretty quickly. We have actually had -- our in customer on this project has actually been giving us very quick paced orders. These things I think some of the folks on this call who have seen these machines they could not fit in a 12 by 12 room, and we have got them pushing us to try to get deliveries in less than eight weeks. So it has been somewhat challenging on the inventory side. But again, I expect it to have a pretty good run-rate in the September quarter, not so much in the December quarter based on what we see right now.

And then Ed pointed out in his prepared comments that your customer base on the Tool Automation side has given guidance for September shipments of anywhere from down 2 to down 22. I'm kind of curious on both the bookings and revenue side where do you see your business coming in, and can we look for some share gains as early as the September quarter to help offset some of the sequential declines from your customer base?

John, I think what we are seeing is we expect as we guided our business from a revenue perspective it is going to be done about 10%. Bookings may be flat to up a little bit. So that is our take on the world. And the question is, are we going to get any incremental design-in wins that would show share gains in this September quarter?

You know I would certainly hope that would be the case. I think we have some things on the radar screen that could come in, but at this point when we look out, we're trying to be as accurate as we can on what we think is really going to happen.

Can you give me a little bit more granularity on what you think is going to happen in the Tool Automation business? Because if software comes back stronger both topline and bookings in the September quarter, I'm just kind of curious relative to that down 2 to down 22 for your customers, where you think your business might be coming in?

Yes, as I said, I think the Tool Automation business is probably going to be down revenue about 10%.

Okay. And then last question, when you look at the fab database, which you're showing an uptick in December, I'm just kind of curious is that DRAM dependent, foundry dependent, logic dependent? How does that work for when you're looking at December and March as far as what is driving your forecasted recovery?

Well, I think if you look at the new fabs as being the big drivers, it clearly is a mix of really all three, maybe a little bit light on the foundry side. But you know that mix of those two quarters is not heavily loaded one way or the other.

Bill Lu, Piper Jaffray.

Actually Dennis calling for Bill Lu. First, regarding gross margins for the factory of the hardware, it is actually up from last quarter. Is this a one quarter event, or is it going to stay there for the next few quarters?

I think it will be more sustainable in the next few quarters if you go back and look at last quarter we had $4 million of the revenue amounted basically zero gross margin. So but even now with the performance of it, as we've said before, we resized this business going back about two quarters ago to try to keep the silicon stay above the red. But I think you will see that from a revenue side that this past quarter's revenue will be kind of about what the model should be or maybe it was a slight decline in revenue from quarter to quarter. But we have been bleeding off a lot of large backlog items over the last couple of quarters.

And I think it is just a result of our decision to target good gross margin business.

Okay. Next question I think, Ed, you mentioned about you are seeing accelerating in the outsourcing from your customers. Is it Brooks specifics, or you see this is an overall trend for the whole automation space?

You know I think it is a trend for the Tool Automation space. I would not -- I'm being very specific and not including some of the factory hardware, which is already highly outsourced. I think software has been outsourced mostly, but you know it is a different dynamic in the software space. So my remarks about the potential of having this increase is largely driven by the slowdown in business, which gives the semiconductor capital equipment guys an opportunity to go look for how they are going to save cost and how they are going to respond with their Next Generation platforms.

So with those two key items and, in fact, we are in a slowdown in September with a slight recovery in December, this quarter gives a great opportunity for new designs to be adopted. And those can be adopted and they will roll out sometime in the next 12 months.

I see. And my last question is that, can you comment about the number of design wins this downturn versus last?

Well, I think the thing we are starting to see, and I don't have the previous numbers, is clearly the design-in wins are much heavier loaded on the system side. As a matter-of-fact, our systems-based business is increasing, and so I think that probably the biggest difference is just the things that are being designed in are not just robots or load ports, but they are Atmospheric or vacuum systems. And I think it is very consistent with the statements that we have made of the incremental outsourcing at about 4 or 5 percentage points a year. The big driver in the future is going to be systems and the biggest opportunity is clearly in vacuum systems, and that is one reason that we wanted to bring the Helix Group into our mix, because that is where the biggest opportunity is, and having those guys with us gives us a larger content of the opportunity and positions us to win more of the deals.

CJ Muse, Lehman Brothers.

I was hoping to I guess dig a little deeper into your flat-panel display business. Can you talk a little bit about what the hardware opportunity looks like in 2006? Is that driven by just one customer in Korea, or do you have multiple customers on the hardware side?

The flat-panel display business in Korea is largely driven by a small group of customers. There is one large customer and a couple of other smaller customers. It is pretty much all in Korea, and in our business, we are heavily focused on the substrate radio vacuum cluster tool. So we really don't do much in the Atmospheric -- we don't do anything in the Atmospheric base for flat-panel of the large Gen 5, 6, 7, technologies.

So we are very focused on the vacuum space, the vacuum robotics, the vacuum transfer stations, and in '06 you know quite honestly what we see in the industry is an overbuild in some of the Gen 4, Gen 5.5, Gen 6 technologies, but we do see expansion of some of the leading-edge suppliers into the Gen 7, 8 and actually some discussion of a Gen 9 technology. We may see a crossover point in this new technology for different methodologies in transport, which we have been looking at.

So I think the big leaders are going to drive this business, and there is no question that as we look into the business next year that the single largest driver is televisions, not computers anymore. So the rate at which flat-panel televisions are adopted by consumers is going to be a large component of whether or not this industry grows next year.

And I think playing to that thesis, if you look at where the big displays are going to be made, clearly Korea is where the highest concentration of big substrate manufacturing will be. So we feel pretty good about having an operation in Korea. I think the Korean display makers control more than 50% of that market now, and if the shift is to big substrates, that is kind of the place we want to be.

I guess I must have heard you incorrectly. I thought I heard you say you're not doing Gen 5, 6 or 7?

We are, we're doing Gen 5, 6 and 7, but before Vacuum Automation Systems only. We're not doing Atmospheric Automation Systems.

Okay. So --

This past quarter one of the highlights was we shipped our Gen 7 vacuum system.

And was that the first?

It was the first, although we may have shipped more than one.

And what kind of tool was that?

It was a CVD tool. We may have shipped other configurations of a Gen 7 prior to that, but it, indeed, was the first of a particular architecture.

Great. I guess to move to another subject, in terms of Helix, you reiterated outlook for the acquisition to close in the December quarter. Can you talk about sort of the leg work that you have done since SEMICON West in terms of formulating a plan for integrating the Company and what you can share with us today on that?

Well, we have identified an Integration Steering Committee. We have laid out a schedule full of activities with all of the requisite regulatory filings and establishment of task forces reporting to the Steering Committee for each of the functional areas, and we will begin to kick that program off later this week, and we will continue to have ongoing meetings and planning meetings until we get the final approvals, and once we get the final approvals and go for a shareholder approved shareholder vote, we will actually start working towards implementing some of the required changes.

Mark Fitzgerald, Bank of America.

I was just curious about the option expense for the quarter?

Mark, I would be disappointed if you did not ask that question. You will see it in our footnotes, but I think it is -- bear with me one second while I go through it. 1.6 million is pretty flat to what it was last quarter.

Okay. Not much of a change for the December quarter?

No.

Okay. And is there any kind of swag on the tax rate for next year?

If you stay -- you can stay fixed at the 1.2 to 1. -- if software revenue starts to grow, it bounces between 1.2 and 1.5. Again, it depends on where we sell software, which jurisdictions, but you're somewhere between -- don't use a rate. Think of it as a fixed number is a better way to think of it.

Okay. All right. Thank you.

Tim Summers, Stanford Financial Group.

Just a clarification on something that was said earlier. With regard to the more optimistic tone about the December quarter and then the March quarter, are you seeing a general level of increased business for Brooks, or are you expecting market share gains in a relatively flat environment?

I think the premise of this is the new 300 millimeter and 300 millimeter expansion projects that we are tracking that are expected to take delivery of equipment in December and in March, so it is a broad-based view. Of course, we hope to incrementally gain share as well. But it is an expansion of the overall market in those two quarters.

Does the AMHS business participate in this upturn, this possible upturn as well?

Well, I think we will continue to benefit from projects that we are already involved in and continue to sell spare parts and other things, and I think as we commented earlier I think we have right-sized that business and the margins are reasonably acceptable now. So we will continue to participate in 300 millimeter AMHS at a low-level, but we will be profitable.

John Pitzer.

Mike, maybe just a follow-on to that last question. How many projects do see that you can bid on on the AMHS front over the next six months? And what is the revenue run-rate today just out of AMHS?

Yes, let me take that one, John, rather than Michael. You know first off is we look at the number of projects that we could chase there are probably a half a dozen. The product number that we will chase is less than that by a long shot because we made a conscious decision that we are not going to out and chase just everything out there. That is a very expensive proposition. We're only going after and working with customers who want to partner with us to get the best AMHS products in the industry. If they want to buy a commercially available product at a very low-price, then we are not the place to shop.

And I think to say it a little bit differently, John, is it really is an architectural decision. I think the companies that are interested in undertrack storage and a new type of stocker or a carousel stocker, that is our sweet spot, and some people fall into that category, and the ones that have done those projects with us I think have benefited greatly. So I think it is more of a, are you interested in the approach that we are promoting, and if you are, then I think we will bid and bid aggressively. But to chase projects where the customer is extremely conservative architecturally does not make a lot of sense, and we have kind of decided not to do that broadly.

And then just my last question, I might have missed this, but as far as housekeeping, what percent of the revenue this quarter was 300 millimeter, and the reason why I ask is a couple of the ion implant guys gave a split that was more heavily favored towards 200 than I would have expected in June. So I would be kind of curious as to what you guys saw in your business?

Well, I think on revenue we would think the 300 millimeter number was about 55%.

Timothy Arcuri.

Just a follow-up on these margins in the flat-panel business. What is the long-term model for acceptable margins in that particular business?

Well right now, Tim, we kind of cracked in where -- and we are still having some startup because the unit sizes are -- the bill of material on this thing is over -- it's just under $1 million. It is close to 900,000. So as we are starting up and trying to get more engineering levels to finalize bonds and stuff like that, I think we're going to see margins -- like I said right now, it is probably in the high 20s, and I think it will inch its way up into the low to mid-30s at best. Margins in this space are actually pretty tough even in the vacuum side.

Yes, because if I look at your numbers and if I strip out the CDA business and I also strip out the flat-panel business, you know it looks like on 25% more revenue relative to fiscal Q1 '04, which is like kind of seven to eight quarters ago, that margins are roughly on an apples-to-apples places 400 to 500 basis points lower for the non-CDA, non flat-panel business. And I'm wondering is that just kind of -- (multiple speakers)

(multiple speakers) -- what volumes you're looking at?

I'm just looking at revenue. So if I compare revenue in this quarter ex the CDA and ex the flat-panel to a period seven to eight quarters ago when you did not have flat-panel or CDA revenue, you have a fairly sizably lower margins.

What was your revenue run-rate you are looking at?

42 and the margins were up in the mid-30s.

I don't have the data right in front of me, but you're saying 42 million in revenue?

Yes and that is at a time when you had no CDA or any flat-panel revenue. We can talk about it -- (multiple speakers)

The margins for the rest of the year is -- the way we measure the business is internally. We look at -- within the equipment automation space, I look at standard margins, and then I am looking at variances is the way -- and again is the way most companies measure it. And our margins in our vacuum and atmospheric systems are actually holding on a standard level very very well. And even on the component side, they are holding very well. So part of it ends up being the variances that are driven into the P&L, and some of what we are doing on the service side I think we have spoken a couple of times about how much support we're throwing into the some of the AMHS side and how all that is going to actually hit the factory automation side. It's not going to really hit the equipment side.

But if you look at -- the other thing you may want to look it is the inventory build. Inventories a year ago we were hitting ramps, so from a purchasing level, we are $50 million lower this year in raw material purchases than we were a year ago. As you can see last year, we had an inventory ramp. This year we've had an inventory reduction as we have gotten pretty aggressive there. So we were running favorable variances a year ago and unfavorable as we currently have the output of the factory laid out. That might be a piece of it.

Henry Hooper (ph), Nuremberg Asset Management.

This is David. It has been three weeks I think to the day since you announced the pending acquisition of Helix. You have already talked with us about your plans for a schedule and integration of task forces. But I would rather ask a subjective question and say, three weeks down the road, what have you and Helix been learning from what you disclosed at SEMICON West about the synergistic benefits of the combination?

Yes, I think we have reinforced that, David. We have met with virtually every customer who would be impacted by this and a resounding support from the customer base. All of them see this as beneficial.

Actually from an employee base, we're having quite good response. Employees see this as a strengthening of the overall business. So the synergies that we had planned to achieve we believe are clearly in sight. We are not going to make commitments to go beyond that today, but we have had a number of sessions digging into what the opportunities might be, and we will be back in probably another six to eight weeks with some detail on what other synergies we might be able to find.

Thank you. A follow-on question for Bob, would be, Bob, what do you think your combined cash balances will look like by the time you get to the end of the fiscal year?

Combined?

All the pockets, from the 349.7 million that you're at right now.

315 I think Helix is sitting on about 26 or something like that, so about 375. We should be a generator this quarter. Mainly because of some of the uplift we had this quarter, we didn't get the benefit in receivables, and I do expect on the other working capital side to get down.

This quarter, David, we had $4 million cash outflow with interest, which is you know, semi-annual. So that was another piece of it, but I would expect north of the combined 375, so closer to 380, 385.

Okay. So a couple of moving parts there would be based on the number you threw out earlier about inventory maybe as much as 2.7 million coming out of inventory this quarter and also some further reduction in DSO?

Yes.

Gentlemen, there are no other questions holding in the roster. I will turn it back over to you for any additional or closing remarks.

Thank you for joining our call today. This concludes our call.

Thanks again, everyone. Have a good day.