Azenta Inc (AZTA) 2005 Q4 法說會逐字稿

Good day, everyone. Welcome to the Brooks Automation fiscal Q4 and full-year fiscal 2005 earnings conference call. Today's conference is being recorded. At this time, I will turn the call over to Mr. Mark Chung. Please go ahead.

Good afternoon and welcome to Brooks Automation's conference call to discuss the results of the fourth quarter and full fiscal year 2005, ended September 30th, 2005. The press release announcing the results of the quarter was sent out this afternoon at approximately 4 p.m. Eastern Time. You may obtain a copy of the press release from our investor relations website at investor.brooks.com. Or you may call the Investor Relations department at 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. Also present on the call to help answer questions is Jim Gentilcore, Chief Operating Officer of the Semiconductor Products Group in Brooks Automation.

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 materially 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.

Now, I will turn the call over to our CFO, Bob Woodbury. Bob.

Thanks, Mark. By now, you've all seen the results of our fourth quarter and fiscal year. Revenues for the fourth quarter finished about in the midpoint of guidance, while earnings held up reasonably well, with pro forma net income for the quarter coming in at essentially break-even on a per-share basis. GAAP earnings were a loss of 7.6 million, or $0.17 per share, as our restructuring charges were considerably higher than our guidance, as we resized our software business and took a reserve for one of the vacant buildings still remaining from the PRI acquisition.

Orders for the quarter were 86.4 million, comprised of hardware orders, including service, of 74 million, down about 6 million from last quarter, and software orders of 12 million. Hardware orders were sluggish, however, we did see, as we expected, some momentum start to build during the month of September, and continuing right into this point of the December quarter. Software license bookings were down for the second quarter in a row, due to continuing industry softness and slow traction in non-semi verticals. December is usually a big maintenance renewal period, so we do expect to get some uplift this quarter. We did take additional actions for resizing the group in early September, as a direct reaction to the lighter volume.

You'll notice that we've migrated to reporting our business in two segments, hardware and software. This is more reflective as to how the business is being run and how after the acquisition of Helix we will be measuring it. Revenues for the quarter were 103.3 million, pretty much at the midpoint of guidance. The mix was slightly better than expected in hardware, with revenues of 83.6 million, and software revenues of 19.7. Our top 10 customers accounted for 50% of revenues, and on a geographic basis, 51% was North America; 13%, Europe; and 36%, Asia.

The gross margin as a percentage of sales was 35.6, slightly better than expectations, especially given the lighter software mix. Margins in the hardware segment were 29.3%, up 200 basis points from last quarter, principally due to better mix within the hardware products group. Software margins were 62.6%.

Q4 operating expense was 37.2 million, again about on guidance, broken out as 14.7 million in R&D and 22.5 in SG&A. Our SG&A was slightly up, due to additional depreciation of our CRM system for 1.3 million, which we will also take a hit for a similar amount in the December quarter, as we're changing our CRM systems. There was also amortization of intangibles of 736K.

We had restructuring expense of 7.1 million, broken into two major areas -- 1.5 relates to the PRI building, which we expected to have an a tenant occupying by now; and the remaining 4.5 relates to actions taken to reduce costs, principally in the software division. During the quarter, the Company had 461K in net interest income, and about $1 million in other income. The tax provision was 939K, again primarily related to withholding and income taxes in foreign jurisdictions.

Again, the GAAP net income for the quarter was a loss of 7.6 million. Included in our results were restructuring charges of 7.1, and 736 of amortization expense. The total of these charges accounts for $0.17 per share. As many of you measure our performance before these charges, this equates to a break-even result on a pro forma basis.

Turning to the balance sheet, cash, cash equivalents and marketable securities at the end of the quarter were 357 million, up 7 million for the quarter and 28 million for the year. We put a lot of effort this year into working capital management, with inventories declining a total of $24 million at the end of the year, and DSOs finishing at 68 days. Our inventory turns were 5.5 times, with inventory finishing at 48.5 million. Lastly, depreciation was 4.2 million, and CapEx about 3.2 million in the quarter.

To look at the full-year revenues, they finished at 463.7 million, gross margins were 35.1%, and OpEx of 145.9 million, for pro forma operating income of 16.9 million, or 3.6%. Net income was a loss of $10 million, or $0.22 per share, which included restructuring of 16.5 million, amortization of 3.1, and a loss from discontinued ops of 3.5. On a pro forma basis, this accounts for net income of 13.1, or $0.29 per share, for continuing operations.

Lastly, as you all -- as you all know, we've announced the closure of the Helix transaction on October 26th. We're very excited about that deal and looking forward to the business opportunities that we have on a combined basis.

To talk about guidance, for the December quarter, we expect orders to be between 125 and 130 million. Base Brooks up 15 to 20%, composed of a slightly a slightly better order picture in hardware and an improvement in software. We expect Helix for the two-month period to be about 30 million of the total. We expect revenues to be between 120 and 125 million; gross margins of approximately 34.5 to 36%, before an inventory step-up charge of approximately $10 million due to the acquisition; and operating expense of about 45 million. I'm expecting break-even from operating income for the period.

For clarity, the Helix components of the above are about 30 million in revenue, 41% gross margin, and an additional 9 million in OpEx. We'll continue to guide on a GAAP basis, and to that end, GAAP EPS should be ranging from a loss of $0.25 to $0.30 per share. Again, this does include amortization of 2.8 million, restructuring of about 0.5 million, stock option expensing of 1.5 million, and inventory step-up of about 10 million, for total adjustments of about $0.25 per share. Shares are estimated to be about 64.6 million on a prorated basis for the quarter. On an apples-to-apples basis, this would compare to your consensus numbers, which exclude these charges, to a loss of about $0.01 to $0.05 per share.

To model the new combined Company, I'll guide to the break-even models we've spoken to in the past. Brooks' traditional model was operating break even at about 105 million, with gross margins of 35% and OpEx of 36.5 million. Helix's break-even is about 35 million, with gross margins of 39.5%, and OpEx of about 14 million. This gives, on a combined basis, quarterly break-even operating income of about 140 million, with 36 to 37% gross margins, and operating expense, before synergies, of 50 million. I would expect operating synergies to be about 2 million per quarter starting in the March quarter. Additionally, below the line would be a full quarter amortization of 3.7 million for intangibles, interest income of about 0.5 million a quarter, as well as option expense of about 1.5 million a quarter. Taxes will be principally foreign income and withholding, at about 1.5 million per quarter. Shares for the combined new Company will be about 75 million shares on a full-quarter combined basis.

And now, I'll turn the call over to Ed.

Thanks, Bob. And good afternoon to the callers. Before I review the highlights of the quarter, I want to thank the team at Brooks for staying on track with our operational and strategic objectives for the just-concluded fiscal fourth quarter and fiscal year 2005 in a very soft market. We executed on our new product development and deployment. Furthermore, with the recent completed strategic combination with Helix Technology, we believe we have strengthened our Company in many areas, including operations, our ability to service our customers, and our position has a complete vacuum system provider, while creating value for our stakeholders. This past fiscal year, was a very exciting and evolutionary year toward our goals of creating a great Company around higher-value, integrated, engineered product content; expanded global service; and diversification of execution software products.

I'll mention several important highlights accomplished during 2005. First, as I mentioned above, the combination with Helix Technology. Second, our hardware business introduced the most number of new products than any other single year of the Company history. In addition, we introduced four new products in the execution software space. Third, the continued success of our customer designed automation system business, which grew over 20% and is positioned for further growth with the ongoing outsourcing by our OEM customers. Fourth, making improvements in delivery and quality by restructuring our global manufacturing and supply chain into low-cost centers of excellence with regional, final integration and test centers.

Fifth, outstanding balance sheet management, reduction in inventory, and generating over 27 million in cash over the course of the year. Sixth, our great progress towards successful compliance with Sarbanes-Oxley requirements. Seventh, tremendous improvement, on-time delivery and quality, achieving global recertification of ISO 9000. Finally, initiated -- we initiated a restructure of the software business, refocusing our primary efforts on semiconductor and life sciences, and leveraging lower-cost development in India and Korea.

Of course, there were some disappointments, particularly with the decline in the Company's top-line revenue, although this was generally in line with the semiconductor capital equipment industry. We also did not realize improvement in overall gross margin as much as we would have liked, as the progress we made on the cost side was offset by lower absorption arising from less volume and higher mix of CDA business. Finally, we experienced a decline in the software revenues at a more rapid pace than expected in this semiconductor space.

Let me now discuss the current industry environment from the Brooks' point of view and review our quarterly performance within this framework. The semiconductor industry remains cyclical, however, we are seeing a change in the magnitude of swings and the shortening of cycles. We believe that industry equipment shipments reached a bottom during the September quarter, according to our expectations, and consistent with our statements in the prior quarter. Bookings did not recover as we had expected, however, we did see indications of an uptick in bookings beginning in late August, early September time frame. We expect to see this trend continue into the December and March quarters.

The December quarters see a reaccelerating of shipments in the industry, although actual revenues of our OEM customers may not demonstrate significant improvement until the March quarter, depending upon lead times and revenue recognition practices. In general, key fundamentals, such as capacity utilization, appear to be improving, which point to a near-term upward inflexion. I want to caution, however, that the longer-term outlook for the second half of '06 is not clear, and will require a continued growth in end-user demand to support sustained upturn.

The number of fab projects in the December quarter indicates the start of an industry recovery. We continue to track 27 projects, total, for calendar year '05, with 11 new and 16 expansions. We are currently tracking 30 projects, total, for 2006, with 11 new and 19 expansions. In the September quarter, Brooks met our prior revenue guidance, exceeded our expectations for gross margin and earnings, while continuing to generate cash. Revenues were helped by strong shipments to the flat-panel display industry. Although bookings declined in the quarter versus the previous quarter, contrary to our expectations, we believe orders started to improve as we exited the quarter, especially in our hardware business.

From a market standpoint, we captured 12 design-in wins during the quarter. Our introduction of the new [Series 9] atmospheric products and the Marathon series vacuum products has generated a lot of interest and excitement from customers. We have already shipped many of these new products as beta units to customers and we're pleased with the progress we're making on design-in wins for replacement of existing and next-generation platforms. We are pleased that major North American OEMs selected and received shipment of our MagnaTran vacuum transfer robot as a replacement for their existing in-house designed robot used on one of their major tool platforms.

The outsourcing trend by OEM customers remains quite evident. Many of our investors ask about progress at some specific large OEM customers. While we cannot disclose specifics at each customer, we remind you that we do not expect a sudden step function in business with these customers, but rather a measured increased over several quarters, as their new designs become mainstream products. We have already started to successfully ramp our drop-in replacement program for vacuum robots with a key customer, and we continue to pursue other design-in win opportunities. Our new products are compelling entry points for these customers.

We believe that our new hardware products will start to represent a bigger portion of our business beginning in 2006 and ramping through thereafter. Our software business faces a -- faces a challenge as 300 millimeter manufacturing becomes mainstream, and the overall number of new fabs stays flat or decreases. While many new fabs are incremental additions at existing customers, thus likely reducing the overall revenue opportunity per fab.

We recognize that the growth in our software business cannot be driven solely from the core semiconductor base, so to maximize the value, the growth must come from entering new vertical industries. We had previously set ambitious goals and high -- had high expectations for this initiative. However, we have seen a slower expansion in the software business for two reasons. First, the market for execution-based software in the new verticals has not grown as quickly as we expected. Second, our new product development and deployment has not gained much traction in the broad markets we targeted.

To that end, we have decided to concentrate first on life -- the life sciences vertical for our software. We have hired an outstanding industry team with domain knowledge of the regulatory requirements and applications in the life sciences industry, with an aggregate of more than 50 years of industry experience. In the last quarter, we took the restructuring charges for the software business to lower fixed expense and shift more R&D to lower-cost regions such as India and Korea. We believe this is an appropriate action at this time, recognizing the time and investment required to be successful in the new vertical.

Even though overall bookings for software declined in the quarter, we won a number of key MES opportunities with the major semiconductor customers, including two facilities in China and one in Japan. We made progress with Activity Manager, adding a second flat-panel display manufacturing line at a major Korean customer for their Gen-7.5 product. We're excited about the opportunities to provide Activity Manager as an add-on application for any existing fab.

Bob already mentioned that we recently completed the acquisition of Helix Technology on October 26. We welcome the Helix employees to Brooks. And I'm extremely pleased to strengthen our management team with the key members from Helix, starting with Jim Gentilcore, who is now the President and Chief Operating Officer of our Semiconductor Products Group. I believe that Jim will provide outstanding leadership for our hardware division. I want to emphasize that we have already begun to roll out new -- a new service strategy for Brooks, based on the strong service model from Helix. On the day of closing, we deployed the first new implementation of the GUTS, Guaranteed Up Time Service, model for many Brooks products. There are aggressive plans in the new service business to capitalize on the broad install base of Brooks products and provide better support globally to our customers. Global operations will centrally support manufacturing and supply-chain for all hardware product lines.

Brooks will benefit from many contributions from Helix. We believe that the vacuum tool automation is the fastest growing segment in automation with [PTP] growth from 2004 to 2008 estimated to be more than 30%. And we are better positioned now to pursue this opportunity with increased stability to deliver complete vacuum systems with more integrated engineered content. We are focused on integrating the two Companies quickly, and I believe that we have made good progress so far. We will start to achieve some of the targeted 10 million in cost savings beginning this quarter, and as Bob said, accelerating through the remainder of the year.

We are excited by this strategic combination, and we believe it creates a strong value for our customers, employees, and stockholders. So even as we navigate through a soft business environment, Brooks is well positioned to benefit from improving industry fundamentals; from growth opportunities, such as increased outsourcing from OEM customers; from better relationships with key customers; and a more focused approach by our software group to broaden its business outside of semiconductors. We thank you for your interest in Brooks and your continued support.

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

Thank you. [OPERATOR INSTRUCTIONS] The first question comes from Robert Maire with Needham & Company.

Yes. You're guiding up business in, sort of, the 10 to 15% range. Could you give us a little more depth on that? What's that based on and where is that coming from, perhaps, on a geographic or end customer basis?

I -- what -- please let us understand what your question is. You're measuring against the Brooks base to the combined Brooks Helix base as a 15% up, is that -- ?

Well, you had given up guidance, correct, for the current quarter?

Yes.

Right.

Okay. Can you tell us where that's coming from and what is giving you, sort of, that confidence in it? And is this based on orders in the first few weeks of the quarter? Or what's the -- and where's that coming from, perhaps?

I think our business is clearly seeing an uptick in bookings in -- starting in August through September. Much of that will be turns business on the Brooks side. And for the Helix product line, there's a large percentage of the business that's turns business. So, yes, in fact, the reason for our confidence in the uptick is more in line with the business that we're seeing from a bookings perspective.

Okay. And in terms of end user demand, to the extent that you have visibility as to where a lot of that product is winding up, memory, foundry, any particular sector that you feel is strengthening more in the near term here?

Not really. The memory device investment continues on track. I think you're pretty much all familiar with the investments in flash memory and continued investments there. The continued investment in the logic side stays on track. And I think the only thing we're seeing as a beginning emergence is some of the foundries are looking at making investments. But it's not clear that those are going to drive this quarter.

Okay. And if -- in your comments you talked about September sort of being the bottom for the current cycle with, perhaps, less volatile ups and downs going forward from that point. Do you expect that the ramp off the bottom will be a slower ramp than previous cycles?

Obviously that's relatively unpredictable. However, given the past ramp that we saw in 2004, which was a fairly rapid ramp, but not a very long cycle up, one could expect, and what we're -- what we see is that 2006 is beginning to look like an upturn, but, clearly, we do not see the second half as having a sustained upturn for the -- at least as we see it today, so --

And one last thing. I would imagine that inventory levels at your OEM customers are relatively lean at this point, so there should be a relatively fast follow through if they receive any orders from their end users?

I believe that's absolutely correct.

Okay. Great. Thank you.

The next question comes from Jim Covello with Goldman Sachs.

Good afternoon, this is Amanda Hindlian for Jim Covello. A couple quick questions. For the revenue guidance for the December quarter, that only includes two months of Helix; is that correct?

Correct, Amanda.

Okay. So it looks like you're guiding the core business down a little bit quarter-over-quarter. Can you talk about what's driving that?

Sure. Two things. We are expecting software to be a little bit lighter this quarter because of the bookings in this past -- in the September quarter. So software revenues were 19 in the September quarter, and we've got them down a couple million in expectations in the December quarter.

Additionally, we had on our equipment side, we had pretty good shipments in Q4 of flat-panel product, and as we finished up some contracts there. So that we -- that won't repeat again this quarter. And we also shipped some deferred stuff out of our inventories. We saw our inventory decline. So we expect pretty good -- pretty good shipments into our -- what we would call our normal tool business. And, again, flat panel down and some of the factory stuff will be down.

Okay. That's helpful. And then on the Helix deal, I'm wondering when that will be accretive?

When it will be accretive? I expect to see operating income from Helix this quarter.

Okay.

So we should see -- we should see some accretion from a Brooks side this quarter.

Okay. And then in Q3, the margins came in a little bit better than expected. You talked a little bit about this, but I just want to get a better understanding. Is that mostly driven by the mix in hardware?

Yes, it is. I wish we could say we had significant improvement. We had a little bit better absorption, being lower spend, but in all honesty, we had a little bit better -- we had less CDA, we had more flat panel, which actually goes out higher than the average by a little bit, so that pulled it up. And we had some pretty good vacuum shipments as well, which pulls up the average. But it was very good performance on a shipping side but it -- truthfully, it's really more the favorable mix.

Okay. Thank you, so much.

The next question comes from Jay Deahna with JPMorgan.

Hi. This is actually Chris for Jay. I had a couple questions. Number one is -- You guys work on any integrated products yet with the new Helix acquisition?

A little bit early since we've had this thing for a couple weeks now, so -- I think that the -- the teams are talking, but nothing on the -- nothing on the short horizon to ship this quarter. I'll let Jim actually jump in and --

Yes, Jay, the only thing I would add to that is that on the service side, as Ed mentioned in his prepared remarks, we hit the ground on day one with some integrated service offerings to our -- to our installed customer base.

So, I mean -- so you've basically just expanded GUTS over to the Brooks side as well and have you seen any -- ?

Starting to.

Okay. Starting to. The other kind of question I wanted to know is any -- on these MagnaTran and the Marathon vacuum platforms, are any of these new wins for 300 millimeter?

Yes. Yes, they are.

Can you give me any color of which applications? You don't have to give company, but, like, are they for CVD, are they for etch, are they for what?

I think the biggest one is PVD and CVD.

PVD and CDV? So, all right. And then the last question I had is -- I guess, when do you -- what is the -- what are the initial, like, combinations of Helix, Brooks products? I mean, are you guys going to -- do you have, like, a time line for when you expect products between the two Companies to, kind of, meld together?

Yes, I'd -- I would go back to what Jim said and reinforce that. The first products that will be large contributors to us will be in the service arena. We'll be focusing the near-term efforts around service products and growth in the service area, which we've talked about in the past as one of our core objectives. The integration of the products that Helix and Brooks make into the next generation platform will be worked on as, quite honestly, as next-generation platform designs. And those are just going into the new product development cycle. So I don't particularly see that we will have integrated designed products for throughout the development cycle, which can take anywhere from a year to two years. However, there's no -- one could see the fact that we would work with the same customer to sell products through our channel together.

All right. Thanks a lot. Appreciate it.

This question's from Steve O'Rourke with Deutsche Bank.

Thank you. Thanks for taking my call. Ed, based upon your response to, I think, Robert's question about 2006, and I'm not asking for guidance out of the 2006, but is it fair to say that the way you see things now is a few quarters of improving orders before a fall off in the second half? Or can you even speculate on the second half?

Yes, I think what I said, Steve, is the second half is going to require continued pull from the end users, meaning the semiconductor manufacturers, to make the semiconductor capital equipment stay on track with any growth. And, quite honestly, we've seen so much volatility in the demand for semiconductors in the last three or four months with the changes in oil prices and inflation rates and all sorts of other things, there's just way too much uncertainty in the end user demand to be able to predict anything in the second half.

Okay. Fair enough. And last quarter, I think on the call, you had mentioned that you had some confidence in fiscal Q4 because the fab database told you so, and orders were a bit weaker than you expected. What gives you confidence in December for orders? And do you just see things kind of ratcheting out a bit?

Actually, just to clarify, Steve, we said -- I think, if you went back to the notes -- we said that the calendar Q4 would be an up -- not the fiscal Q4.

Okay. My mistake.

And, the -- in fact, we did not see -- we didn't see the ramp start until August -- late August, early September.

Okay.

However, we've continued to see the strength that we expected into the December quarter.

Okay. And a couple product-related questions, if I might? What happened to the SAP relationship that you spoke of a couple quarters back?

Still on track. We're making progress there. We're getting reasonably good pull through. Again, as I mentioned in my remarks, the market in some of these other verticals has just not emerged at the rate that was originally forecasted. So while factories were running on spreadsheets and so on, they just haven't moved over yet and -- but the SAP relationship is going quite well.

Okay. It sounds like you scaled back expectations for software traction in these other verticals, is this really an '07-type thing, or is this something that could actually start to emerge in '06? It seems like we're kind of waiting for this, and just wondering when it emerges.

I think with our refocus on a single vertical, that being the life sciences vertical, and really putting an effort in with this new team that we've hired, we believe that there could be an '07 event that's meaningful to us.

Okay. And one other question, and then I'll be quiet. You -- I think you also mentioned 47 new design-in wins in fiscal '05. How does that translate into revenue? Is there any way to quantify that?

Very hard to do. Those design-in wins -- they ramp at different rates. We think that what those design-in wins do is they get us back in the game at a lot of customers. It gets us -- gets us to be the key supplier. And as their products ramp and they gain traction in their industries, we benefit from that. So design-in win is, in fact, a clear indicator of future growth in the business for us, but it's -- the timing of it is highly volatile and highly dependent on the deployment and success of those customers' products.

And are a number of the design-in wins simply cannibalizing older Brooks products? Or are they brand-new products that are playing to a completely different -- ?

I'd say that -- well, I don't have the data. And I guess I'm hesitating on saying too much about that. I don't -- it's not a lot of cannibalization. It's a lot more new products.

Okay. Thank you.

Moving on to John Pitzer with CS First Boston.

Yes, good afternoon, guys. Thanks for taking the question. Just quickly, when you look at the December bookings guidance, Bob, I think in your prepared comments you talked about software driving a lot of the growth there. Can you quantify that a little bit? And then, I guess, help me understand, as we move from December to March, what's the normal seasonal pattern in software bookings? And do you think that the hardware bookings can continue to accelerate into March to keep the overall business moving higher?

Just go back and set the stage on software bookings. We were running about -- we ran five quarters in a row, which we were pleased with, at about 30 million. Get back to 14 or so last quarter, 12 million this past quarter. We see it this quarter, John, coming in more like in line 1-to-1 with revenues, about 17, a little bit -- 17 and change. So still light on our license basis, because we will get kicker from the maintenance side. And the rest of it being in the -- in the tool side. I would expect it to stay at that level and to start -- continue to start getting an uptick, as opposed to sliding back down to the 12 to 14 range in the out quarters.

And then on top of that, you would expect the hardware side to begin to accelerate?

Yes, exactly.

Okay. And, then, I guess the second question is -- You kind of led us to believe that 140 million is the right break even for the combined Brooks, Helix, where does that stand 12 months from now when you guys are fully integrated? And how much more cost cutting is there left? Or are you guys going to leave it at 140, given your view that this is the trough quarter?

You know me, I'm not going to leave it there too long. 140's pre-synergies. So we will start getting -- I think we said -- 10 million in synergies this year, calendarize to 15 next year. So you're going to start seeing about 3 million a quarter being dropped out on that.

Additionally, we are trying to put in more cost reductions to the back half of this year. I'd say that that's about 200 basis points, but we'll start guiding to that as we see -- I've got the plan, I want to see the traction. Because we did have a light year this past year in getting some of it -- as Ed said, we had a lot of success in the factory offset with -- just because of the lower volume. But I do see -- so the break even I think goes down as we get towards the end of our calendar year as, one, we get these cost reduction programs kicked in; two, as we start getting -- on a quarterly basis, again -- about $3 million in the synergy run rate, getting 4 as we cross over into the year to get to that 15 number. So --

Is the 120 number out of the question, Bob?

The 120 break even?

Yes.

Nothing's ever out of the question. To take $120 million -- to get the break even down to 120, I need to take roughly -- on a quarterly level -- 10 million out of my cost structure. So I just talked about 3, based on synergies, that are planned. If I can get another two to three, four, couple of more basis points on cost reductions, with those two things I've already got on my radar screen, I can get that, as well as some of the other stuff. So 120 is not out of the question. I don't think it's on our boiler plate quite right yet.

The first thing I want to try to do is get a good integration with Helix, get the margins up. But if I need to take it down, I think -- one of your colleagues last quarter asked a question about why was I -- why was I satisfied with a loss at the operating level in the December -- in the September quarter based on the way we guided? And my comment back was, I wasn't going to react to one quarter. We did see, again, the software side, a reduced level of orders. So we reacted to try to pull that break even down again in software this current quarter. So I'll keep reacting to it.

And then lastly for Ed. Ed, when you look at the fab database, you talked about 27 projects in '05, going to 30 next year. I'm kind of curious. Is there enough granularity in that database to kind of compare first half with second half? And when you talk about second half needing continued momentum on the demand side, does that imply that if we see that, that 30 moves higher, or does the probability of 30 goes higher?

I think it's the latter. It's the probability of 30 goes higher. I don't see, major deviations from the 30, the -- obviously, the error band on our forecast is plus and minus some 10, 15%. But, I think the latter is the answer to your question, which is more higher probability of greater success at those 30 fabs.

And so in the fab database, is the 30 next year fairly linear?

No. It isn't linear at all. It looks like Q1 and Q2 --

Fairly front-end loaded.

Fairly front-end loaded?

Yes.

Great. Thanks guys, appreciate it.

Okay.

Next question's from C.J. Muse of Lehman Brothers.

Yes, good evening. A couple questions. I was hoping, first, you could talk a little bit about your timeline for achieving 10 million in operating synergies. I heard Bob say initial 2 million in the March quarter. But then, Ed, I thought I heard you say initial cost savings here in the December quarter. So if you could elaborate there, that would be great.

Let me comment, and I'll let Bob finish up. My comment is -- Beginning in the December quarter, we'll start -- because we're just getting two months of it starting to see, maybe, you get a little bit. But then Bob's comment -- and I think the two tie together, you'll start to see 2 in a ramp through the rest of the year, which is consistent, again, with my comments.

Right. We actually -- we'll have some quarter. It's 2 million next quarter for sure, again, the guys out there that know me, I'll give you a number when I have it absolutely in ice. We have already started acting on reductions within the combined entity. People have been notified, people have left the Company combined, so we'll actually see a little bit this quarter, call it 1 million bucks or so, going up to 2 million next quarter, and, then, accelerating past that. So that's how you get into your 10. But it's -- the path has already been started, truthfully. We're not waiting for January 1st to start ticking into this thing.

And what are your internal targets for exiting the September quarter?

Well, we said we'd hit next year at 15. So next year we would exit on a 15 run rate, going in -- so call it 3.5 to 4 million as we exit the -- a year from now.

Great. And, then, I guess given your strong bookings guidance for the core business, and the level of turns business, can you help me understand why you think your core tool business revenues will be down sequentially in December?

Mostly because of the move out of the flat-panel display business that was a large component in the previous quarter. That's really the only reason -- only significant reason.

Yes. We shipped almost $8 million in flat-panel in the fourth quarter.

Right. But you're still looking for hardware to be up sequentially, right?

Hardware --

On the bookings side?

On bookings, yes.

On the bookings side, but not on the --

Not on revenue.

Not on the revenue side.

Okay. So there'll be less turns business in this quarter?

It's going to follow the same pattern. We started seeing the uptick in the September time frame, we'll get turns on some part of it. But that's, again, compensating for the $8 million down in flat-panel.

All right. And, then, last question. I guess, historically, you've broken out tool automation, factory automation, and then within tools semi equipment, FPD, CDA. I mean, can you give us a sense as to what drove revenue this quarter?

What drove revenue? Well, we are going to go -- well, one of the things that -- we are changing our segment reporting. So, unfortunately, you guys aren't going to get the same breakout you did before. And part of that is the way we internally measure the business.

One of the ways you break out segment there is, we don't measure our business today tool to factory hardware, to be honest with you. We've got 15 different product lines, and we've measuring this -- we actually have broken this out for the Street in two different segments, if you will. So and it gets even more exacerbated with the Helix acquisition, where they've got multi product lines within their own side. Probably the comment I'll make -- I'm not going to go to the detail, because now you've got me breaking segment data out again. The only comment I'll make is that we'd shipped a little over 7 million in CDA, because that is a lower gross margins, and that's been a relative base, as that does differentiate when you try and understand our model.

Great. Thank you.

This question comes from Bill Lu with Piper Jaffray.

Yes, hi, there. Just a couple of questions. One is on the software business. Can you just talk a little bit more about why you decided to focus on life sciences versus some of the other verticals, and how big the market is versus the semi software business?

The reason we picked the life sciences is that, when we went back and looked at the rate at which the execution-based software is being adopted, that was the fastest growing segment. That's number one. Number two is that we were able to bring in a very strong team that had operational experience, domain experience in that space. And when we looked at our success in deploying products the past year, one of the single failures we had was not having that domain expertise on board. So it was fortuitous that that was the market that was growing and that was the opportunity we had to bring in some very strong players who knew that market segment.

As to size of the market compared to semiconductor, smaller is all I can say at this point. And it probably will never get as big as semiconductor was.

So how big was the semi market for software?

I'd have to go back and look, Bill, I don't have the data.

Okay. And, also, on software, margins in the quarter was 62%-some, which is down from the previous quarter. Can you talk a little more about that?

Yes. Just do the flux, Bill, quarter to quarter revenue. Revenue -- when revenue drops in software, it's 100% drop, so we're 90%-plus drop through. So don't get hung up on the percentage, just do the math between the 20, $22 million quarter or a $21 million quarter or to a 19, that 2 million bucks drops right through. So that's -- it's that simple. It's the leverage on software.

But -- and the -- I guess, just to add, just to be more clear on -- we probably had a higher mix of maintenance revenue than license revenue in this past quarter.

Okay. Great. Thanks, very much.

This question's from Mark Fitzgerald with Bank of America.

Thanks. On this OpEx guidance and gross margins guidance that you're giving us, are you guys on FASB -- the 123, the option stuff, does that include the options in the expense? Or is that -- ?

Good question, Mark. No. The OpEx -- I stated that separately so those numbers do not include that in there. I'm not sure how you guys are going to model that in. Most of that -- when we report the quarter, that $10 million in step-up will actually hit above the margin line just because of the way the purchase accounting rules work. And the option expense will -- most of that will hit in the SG&A lines and, again, I'll talk to that. But as you run -- I don't know how each of you individually have heard -- the vast majority, some people putting it in and some people putting it out, but the R&D and the SG&A does not include that. That's why I stated separately.

Okay. And -- but -- as of the December quarter, you're going to be doing this when you actually report, right?

Correct.

Okay.

It'll be in the numbers that go out in the press release, and then I'll talk to how much it is in there.

It's in the forecast.

Okay. Fair enough. And, then, can you just give us a quick update -- Anything on the factory automation side of the business? Is that at all a meaningful part of the mix right now of revenues?

Not -- it's no larger than it has been. And we're staying on track with the strategy that we had, Mark, which is that business is one that we have invested a lot in and we've got some very interesting projects that we're looking at. But we are taking a very, I guess, conservative view of that. And the -- we do not chase all the business. We do not go out and just beat our heads against the wall on it. We think if the value -- if the customer's willing to pay the value proposition, we think it's a great product and they should buy it.

Is it less than 10% of the mix, though, at this point?

Isn't --

It depends if it's bookings or revenue, but in all honesty, Mark, you're doing a good job. We're not breaking segments out, we're hardware.

Okay. Fair enough. And, then, just quick -- ?

Good try.

When you look out over the next year here, flat-panel, do you guys see significant projects out there? Is there something meaningful out there that could drive either the hardware or the software business?

I think the flat-panel -- our flat-panel business from this year, I think if you look at the industry data, flat-panel CapEx spend in the year '05 was probably a high level. It will be on decline for CapEx spend as you look out to next year. So we probably hit the high. We actually had very good shipments back half of this year, and we will be much below that. Our flat-panel systems business this year was close to $20 million.

Okay.

And it will be down year-over-year, clearly.

Yes, I think, Mark, just to add a little color to that as well. Some of the recent data that I saw, there was a flat panel show in Taiwan a couple weeks ago. And the data out of that, confirmed by a number of other players in the flat-panel business, says that the industry's going to be down in the range of 25% year-over-year. That's not our data, that's their data.

The good news is that we have a strong position with the OEMs that we are currently designed into. So they are actually -- appear to be gaining some share. The other side of it is the software side, and we are probably the largest player of MES software in the LCD business. So for any fabs that do get built, we're probably going to get some benefit from it.

Okay. Thank you.

Moving on to Ben Pang of Prudential Financial.

Yes. A couple of questions. First, on the number of fabs and the software business. You guys are -- your database is showing 11 new fabs in 2005 and 11 new fabs in 2006. Is that the data that you gave?

Yes.

And does the software -- aren't you going to have a longer lead time? And, I mean, shouldn't you actually see some acceleration for the software for these new fabs if they're front-end loaded?

Well, keep in mind, as I said in my comments, that we don't see a lot of new customers building fabs. We see new fabs. And when you go from fab number one, which has a fairly high software content, to fab number two, three, four, there's a copy exact from fab to two, three, four. So the integration costs are much, much lower. So the -- as I said in my remarks, the dollar volume per fab declined, which is part of the issue we've got with the software business.

Okay. Okay. And in terms of the other comment of the magnitude of the cycles, why do you think that the, I guess, the top of the cycle may be shorter? Is there some -- what's the evidence that you guys actually see there? Is that from your OEM customers or -- ?

No. I think what we're seeing is that if you look at the 2004 cycle, it was not a very long up cycle. And if you look at 300 millimeter and how the plants are being built and deployed, it's not just one big fab, it's a multi phase in each fab. So it's not as big a discrete lump. So what we're thinking is, based on how 300 meter -- millimeter fabs are built today, and how people phase the tool installation, it changes the cycles, because they don't -- they don't fill up a fab at one time.

Okay. And the last question on the -- the CDA business. What's the rate of converting that to your standard product? You guys have had the product now, I think, for two or three quarters, right? Have you guys already started to see some conversion from the CDA to your standard product?

We had one customer that has converted, yes. And I think this is a very long-haul deal. This is not a quarter-by-quarter issue. This is building a customer-designed system on their platform that they may be shipping for two, three, five years, and a new platform comes in and they would offer us the opportunity to go on our platform on their next-generation tool. But the whole idea here is to continue to supply and get more and more of the components and module business in the CDA segment and then leverage that into the next-generation platform.

So I don't see that as a direct -- let's take tool A with a CDA part that we build, that tool A is not going to convert over to a Brooks platform. It's going to be tool B or tool C downstream.

Okay. So the CDA business, the level of business will continue to increase here, just as your OEM customer ships more of that particular tool, and as you guys win more of the CDA business?

That's correct.

Their tools.

That's correct. And we think we have a compelling argument for why we are a better choice for CDA automation or for that type of business.

So if I look at your overall Brooks hardware business, the pre-acquisition, is the CDA percentage going to -- is that the fastest growing part of your business now?

No, it's not. I think vacuum is the fastest growing part of the business today, which is part of the reason we did the Helix transaction, as we felt we could get more and more growth on -- with what we believe is the fastest growing segment, which is vacuum.

Okay. Perfect. Thank you, very much.

We'll take a question from Martin Teng with SG Cowen.

Can you hear me? Hello?

Hello. Yes.

Yes. A couple of questions. I'm calling in for Raj Seth.

Yes.

First of all, the gross margins for Brooks-based business was down last quarter, right?

They were up.

Up last quarter.

It was up.

I mean, the current reported quarter, was it up or down?

It was up.

It was up? Okay. And you gave guidance for amortization of 3.7 million for Q1; is that correct?

No. 2.8 million.

3.8 million.

2.8. 2.8.

2.8. Going forward, where do you expect amortization to go? [Inaudible.]

Okay. If you go back to the notes, it was 2.8 for December quarter and 3.7 after that. The reason being is that the Helix acquisition is only -- we only are going to amortize two months out of the three. So it's slightly lighter in the December quarter than it will be. But in the break-even model, it should be 3.7 for the out quarter.

Okay. And can you also break down for me -- you guided OpEx of 35 million, right? Can you break down for me -- ?

I guided OpEx of 45.

45, okay. And can you break down for me what the R&D and SG&A is, the breakdown?

It will be -- it will be about 17 in R&D and the balance will be in SG&A.

Okay. Thanks. And just one last question. Regarding the software business. You're restructuring and you're focusing on life sciences. Can you tell me, other than the fact that the adoption rate in life sciences is higher, did you see any competition in other sectors other than life sciences? Is that the reason why you put out those businesses?

No, I don't. The reason I gave is exactly the reason that we did what we did. We found the growth rate higher in life sciences, and we were able to attract a very talented team to focus on the life sciences business. The adoption rate across the five verticals that we talked about last year has not been there. And, therefore, we looked at which one was the best opportunity for us in the near term to backfill for the semiconductor business. And, keep in mind, we did not say we're only going to focus on life sciences, we said we're going to focus on semiconductor and life sciences.

Great. And what do you think is the -- eventually, what -- how big the market is it for just life sciences?

I really don't have a number for that.

Okay. Thank you.

The next question is from David Duley with Merriman Curhan Ford.

Good afternoon. This is actually Maynard Arif for Dave Duley. First, Bob, clarification on the synergies for the March quarter. Is that based on a full quarter of Helix? Or is that based on the December quarter number in terms of the synergies -- or the benefit from the synergies?

We'll probably get 1 million this quarter, Maynard.

Okay.

And that'll be -- you can't get -- no, 2 million -- 2 million in the out quarter -- in the quarters after December. But I'll probably get about 1 million into this quarter.

Okay. And, then, also on the software side you took some actions there. Can you give us a sense what's going to be the break-even revenue for that business in operating level?

Yes. I'm trying to get it down under 19.

Under -- ?

Can't get the people out -- yes. Some of the transition that we took, we've notified a bunch of folks. They won't be leaving quite -- some left. Most won't leave this quarter because we're trying to move some of these guys or their positions into our facility in India and a little bit in Korea. So -- but we are trying to get it to about 18.5 to 19, is what I'm trying to get the break-even down to, from -- down from about 21, 22.

And do you think you can get it after the December quarter, Bob?

Yes. It should phase in -- the people -- there's a bunch of folks that leave -- some left in September, a bunch are leaving in December, and the last tranche leaves fully. We identified about 100-plus people, and have already notified them that they're leaving. Again, the whole hundred is left, if you will, after, let's call it March 31st. There's probably about 40 folks that will leave between -- half those folks will be gone by December. And, then, so it'll be staggered in as we go through December through March.

Okay. And, then, lastly, the vacuum wins that you have with major North American OEM, do you think that that business could be 10% of your business in fiscal '07?

No. No.

And maybe you can help us -- How do you see that progressing at over a time?

I think -- as I said, I think the key is getting the design-in win and then the ramp of that's going to be based on the success of that customer's product in the field. Based on the feedback we've gotten, their product is an exceptionally fine product. And we -- they expect it to be heavily adopted. But, again, it's going to ramp and it's probably not going to start ramping until at least the second half of this year.

Okay. Thank you.

Thanks, Maynard.

Next question's from Tim Summers with Stanford Financial.

Yes, hi. Just a -- several housekeeping questions. I just want to make sure I got this data correct. Bookings in the September quarter for Brooks was 86.4 and Helix contributed nothing to that?

That is correct.

The guidance for the December quarter for Brooks is up 15 to 20%. And, then, including Helix, bookings are going to be at 125 to 130; is that right, Bob?

Absolutely right.

Okay. Good. That was my only question. Thanks.

Okay.

That concludes the question-and-answer session. I'll now turn the call back over to Mr. Mark Chung.

Yes. Thank you for joining us. Let me remind you that Brooks will be presenting at two upcoming investor conferences, on November 30th and December 9th. These presentations will be Webcast live, and I urge you to check our website for more information. This concludes our call today. Thank you .