Azenta Inc (AZTA) 2006 Q4 法說會逐字稿

Welcome, everyone, to the Brooks Automation Inc. conference call. This call is being recorded. Please welcome today's speaker, Mr. Mark Chung, please go ahead, sir.

Good afternoon and welcome to Brooks Automation's conference call to discuss the results of the fourth quarter and full fiscal year 2006 ended September 30, 2006. The press release announcing the results of the quarter was sent out today at 4:13 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 of Brooks Automation to request a copy.

Today, giving the prepared statements on behalf of the company are Bob Woodbury, our 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, who is the Chief Operating Officer of the Semiconductors Products group. 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 than those indicated by such forward-looking statements. I refer you to the section in our press release entitled 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.

Thanks, Mark. We're extremely pleased with our FY '06 results and accomplishments. Looking back at the year, we completed the Helix acquisition and integrated its operations into Brooks. We closed an important strategic transaction with Yaskawa, paving the way for our continued push into the Asian markets. We divested the software business, announcing its sale to AMAT this week. In addition, we supported our customers with a record 693 million in revenue and returned to our shareholders $0.87 in pro forma earnings after a slow start last December. Finally, we finished the year with a debt-free balance sheet while we generated nearly 55 million in cash and finished the year with 191 million in cash on the balance sheet, soon to be in excess of 300 million after we complete the software transaction, as well as dealt with a few other distractions in between.

There's a big difference in the business now from when Ed and I walked in some 40 months ago. I believe it's a direct result of a lot of hard work from many of our employees. Please know how much we appreciate your efforts in making this become a great company. Now to look into the numbers for the September Q.

Revenues finished at the high end of guidance, closing at 210 million. Earnings on a GAAP basis were a profit of 16.1 million or $0.22 per share. Included in this were charging of 6.3 million, which were made up of 0.6 for restructuring, 1.2 million for stock option expense, inventory step up amortization of Synetics of 400K, and lastly, amortization of intangibles of 4.1 million. We've included a table in the press release to try to help clarify this for you. These charges account for $0.08 per share, which went you consider their affects, pro forma EPS was $0.36 per share. Our results also are inclusive of $2.2 million in charges related to legal costs associated with the stock option inquiry which accounted for approximately $0.03 per share. Orders for the quarter were 207 million as we continued to see the momentum of our customer base. This is once again a new record for bookings for the Company in any one quarter.

We've had continued strength in our hardware business with orders totaling 184 million, consistent with trends in the industry. On the software side, orders were solid at 22 million. Of the 210 of hardware -- of revenue, hardware revenues were 186.8 million and software revenues came in at 23.5 million. Our top ten customers accounted for 48% of revenues. We did have two customers with revenues in excess of 10%.

On a geographic basis, 61% was North America, 18% was Europe, and Asia was 21%. Gross margin as a percentage of sales was 37.9% on a pro forma basis. In our cost of goods sold for GAAP measurement, our amortization of acquired intangibles of 2.4 million and stock option expense of 141K as well as step up amortization for Synetics inventory. Again, we've broken this out on a table in the press release to help you. Margins in the hardware segment were 33.7 and software margins were 70.8%, both on a pro forma basis. Q4 operating expense came in at $56.4 million, slightly higher than our expectations. And as I mentioned, included 2.2 million related to the stock option inquiry. We did have a small amount of restructuring of 600K.

During the quarter, the Company had 195K in net interest income. We wrote off the balance of the debt issuance costs in the amount of 1.6 million as a result of retiring the bonds early in the quarter. The tax provision was 1.1 million, again primarily related to withholding and income taxes in foreign jurisdictions. This is the first quarter in which we had Synetics as part of our operating results and we're pleased with their performance as they contributed positively to our operating line.

Turning to the balance sheet, cash, cash equivalents, and marketable securities at the end of the quarter were 191 million, up 24 million from a quarter ago after considering the payoff of the bonds. DSOs were 54 days, inventories were 99.8 million, up as we expected, to meet future demand, and depreciation was 4.8 million and CapEx of 6.7 million. With the announcement of the sale of the software group, we will account for that business segment as a discontinued operation going forward. That means they will not be reported in our revenue, gross margin, or operating expense lines, but we will show their addition of net profit on a separate line titled income from discontinued operations.

For the December quarter, we expect results to be relatively consistent with Q4 with revenues again, excluding software of 185 to 190 million, gross margins in the 33 to 34% range, R&D of 13 million, SG&A of 30 million, which includes 1.5 million of legal expenses related to the DOJ review for total OpEx of 43 million. This does, by the way, include the cost of stock options expensing under FAS 123. Interest income is expected to be 1.9 million and taxes of 500K. Income from disc. ops will be about $3 million. We will continue to guide on a GAAP basis and to that end, GAAP EPS should be ranging from $0.24 to $0.28 per share, that's before any anticipated gains from the sale of the software business. This includes charges of $0.06 per share. Shares are estimated to be 75 million. On an apples to apples basis, that would compare to our consensus -- to your consensus numbers which exclude these for a profit of $0.30 to $0.34 per share. Now I'll turn it over to Ed.

Thanks, Bob, and good evening and thank you for participating in this call. We are very pleased with the Company's performance in Q4, which continued the record pace of the previous quarter. Our fiscal Q4 rounded out a very successful and pivotal year in 2006 for Brooks Automation. We achieved record levels for the -- in the year for revenues, bookings, operating profit, and positive cash flow from operations in a year of significant growth and revenue. We retired our debt and resolved some very difficult, challenging issues from the past unrelated to the current management team.

On the operational performance of the Company, we are pleased with the progress of the integration of Helix Technology with Brooks. The Helix merger has been a successful and tremendously beneficial transaction. I want to commend the team here at Brooks for exceeding our synergy targets for the year. Our new Mexican facility will be at full production level by the end of this month and the transition of the remainder of the CTI production from Mansfield to Chelmsford will be complete by the end of this quarter.

One of the biggest areas of benefit is our service business. Brooks has significantly improved our customer support capabilities by adopting the highly respected Helix service model, allowing us to enjoy better relations with our customers. We remain on track to double the service business in the next three to five years. All in all, the Helix merger has been in my experience one of the most successful in the industry. Remember, I participated in the KLA and Tencor merger so I have a very good perspective on what works well.

From a financial perspective, this transaction has been very accretive to earnings, another important accomplishment that is sometimes overlooked is that we have retained the best talent in the key positions dramatically improving our management strength. Another key achievement of equal strategic importance this past year was performing of a joint venture in Japan with Yaskawa Electric. This joint venture addresses another important need for Brooks, which is our ability to serve the Japanese equipment market, the world's second largest OEM market. The joint venture started operations in September with an outstanding turnout at the opening ceremony by key customers such as Tokyo, Electron, Hitachi, Toshiba, and others, as well as partners from the media and other sections.

We are excited by the level of interest from Japanese customers who want access to the Brooks proprietary Vacuum Robotics and full vacuum systems. We strongly believe that this is the right system for Brooks to successfully do business in Japan. The structure of the joint venture's relationship benefits the near term and long-term interest of both parties. Both Brooks and Yaskawa are very committed to this partnership. Coincidence with the creation of Yaskawa-Brooks joint venture in Japan, we were pleased to complete the acquisition of Synetics Solutions, a North American subsidiary of Yaskawa. At the end of -- at the end of June.

Synetics enhances our presence at many of the top EOMs, including Applied Materials who for the first time in history of Brooks represents more than 10% of our business. Synetics, in its first quarter as a division of Brooks in the September quarter beat its internal revenue target and was accretive to earnings. The integration of this business has been smooth and we are delighted to have this talented and motivated team onboard with Brooks. It is not a coincidence that Helix and Synetics each have a strong culture of being trusted partners of their customers. As a result, they will help drive Brooks toward a more consumer-centric approach that will allow us to have a stronger relationship with our customers.

On the product front, our vacuum tool automation business was our fastest-growing product line for the year, with revenues approximately doubling from the prior year. We captured 16 new design end wins alone for vacuum automation systems. We successfully introduced several new vacuum automation products during the year that is helping to drive and we expect to sustain the growth including the new Mag 8 Vacuum Robot and the new M2 family of vacuum automation systems. Clearly one major win has begun to ramp the volume levels this quarter at a major targeted large OEM. Several other of these wins have already begun to deliver several additional growth in our 2007 fiscal year. Vacuum products, basically cryopumps and gauges made good strides in the implant market in Asia during the course of the year.

We're pleased that we continue to roll out the new onboard IS and combination gauges successfully and they now represent over 20% of the division's revenue. We are also pleased that two Q3 design end wins for our cryopump and water pump systems from a major flat panel and thin film deposition equipment manufacturer turned into orders in the fourth quarter.

With this week's announcement of the agreement to sell our software division to Applied Materials, our business strategy and priorities have become squarely centered on our core hardware business. We appreciate the contribution of the employees of the software division to the past success of Brooks and we believe their future is bright as a part of Applied Materials. Several have asked or speculated about what we will do with our cash. Obviously, there are a number of alternatives with both short and long-term impact which we are not prepared to discuss at this time. Rest assured we will act in the best interest of all of our stakeholders to achieve the highest possible returns on this capital.

Financially, Brooks is on a solid footing and unlike our history, we expect to generate cash from operations and be profitable throughout the business cycles of our industry. Our balance sheet is healthy with more than 300 million in cash with no debt after the software transaction with Applied Materials closes.

On the corporate governance front, while we were burdened with this unexpected distraction this past year, we have emerged from this gray area and largely put these tough issues behind us while maintaining full compliance with regulations, which is a reinforcement of the stronger and more robust controls put in place over the past few years. Looking at the outlook for next quarter, we expect our business to continue at the current levels even though there are some signs of semiconductor equipment industry softening compared to the pace of earlier this year. Bob already gave you the guidance for next quarter and I believe that Brooks is staying at this level -- staying at this level is a good indication of the strength of our product footprint, our market position, and our long-term relationship with customers. The OEM outsourcing trend has continued as we have consistently highlighted. This is a favorable trend that is a major driver that allows Brooks to grow faster than the underlying semiconductor capital equipment industry. While atmospheric front end systems has led the way, the opportunity for outsourcing of vacuum systems remains our greatest prospect for growth. With the integration of the Helix and Brooks vacuum products, we have a significant advantage over our competitors.

Let me mention that we have repositioned Brooks as a business with strong growth, operating margin, and free cash flow from operations which we believe is essential to more stability of earnings through the industry cycles. While we also measure gross margin, we do not believe it is a relevant metric for our business today. And we ask those who follow the Company, do not dwell on that as a proxy for financial performance. The industry may -- remains dynamic, innovative, and challenging. The boom in consumer electronics with increasing semiconductor content, and novel uses of technology bodes well for our long-term business.

More than ever before semi equipment manufacturers and suppliers need to collaborate to leverage low-cost regions of the world to meet the cost productivity and lead time objectives of the end customer. Brooks is at the forefront of innovation in implementing low-cost sourcing to augment our differentiated added value systems and modules. We're working with our customers to drive emerging new strategies. Brooks is a leader in the beginning stages of the merge and transit approach for the industry that helps improve efficiency, cycle time, and quality. We believe Brooks is uniquely positioned to enable our customers to implement these strategies. In summary we believe that we have done a lot of heavy lifting in the past two to three years to reposition Brooks in the market segments with the attractive growth potential and where we can leverage our core strengths. This team has demonstrated the ability to execute under very difficult circumstances and has earned credibility with our stakeholders. We are focused on growing and leveraging our global customer support group to drive revenue and stability through the cycles while establishing credibility and pull through for our products. Through integrating our engineered components in ways that create unique, differentiated value for our customers we drive growth and superior profitability.

As 300 millimeter prime emerges, Brooks has already developed core capabilities with innovative new products. Our priorities are to make our customers successful through our world-class, global support organization while delivering best-in-class systems to the world's top semiconductor and semiconductor equipment manufacturers. I will close by saying fiscal year 2006 was a very successful year and a satisfying year. We're excited about the future of Brooks where we have built a solid business platform that can be leveraged to deliver strong value to all our stakeholders. Thank you, and now we'll open up for some questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Darice Liu of Maxim Group.

Good afternoon, guys. As you're looking at your model, post the sale of your acquisitions in JV and also the ramping of your new Mexico facility, can you update us on what your new target model is?

Well, the break even, Darice, is probably between 130, say 135, because of some of the extra -- some of the SG&A in the interim. But if -- so if you go from 135 up, it's going to be very similar where every dollar beyond that break even $0.45 should drop through the bottom line.

Okay. And then I guess as we head into the semicycle lull, whatever you want to call it, a lot of companies are focusing on leveraging operations and lowering costs. Can you tell us what you guys are doing post all these events that you've had in terms of transactions?

Sure. This is Ed Grady, Darice. We're clearly leveraging our internal operations and leveraging third parties. We have a major sourcing effort that's underway right now that we expect will begin to deliver improvements over the next year and probably into 2008 with dramatic improvements there going forward. But we have a major program that is focused on cost reduction and improvements in cycle time and enabling the merchant transit concept.

Can you put numbers around those major programs?

I don't think we can see absolute numbers yet. I'd hesitate to do that right now, although we probably could come up with something within the next couple of quarters.

Okay. I guess, Bob, you're currently running on an OpEx level in the low 40 million range. Is that what we should be expecting throughout fiscal '07?

Yes, now, that includes some comp. So it should be in the low 40 range, 42, 42.5, $43 million. Again, at that level, it's got variable compensation in there at about 3 million a quarter. So as the business -- if it goes down, that will disappear, if it goes up, it probably will not go up from that level. I'll also remind you that that includes about 1 million to 1.5 million per quarter as you should model in any legal expenses related to the stock option review, especially for the next couple of quarters.

Fair enough. And then my last question is, can you update us on how many projects you're currently tracking this year and next year? And can you break out which one of those are break even -- I mean, which one of those are greenfield and how many of those are expansion?

Yes, Darice. This is Jim Gentilcore. We're seeing the flat models holding pretty steady which is encouraging to us as we look into the quarters in front of us. It's about 36 -- we've had one Fab cancellation out of the 37 that we were tracking originally for 2007 and the breakout is still around 17 new fabs and 19 expansions on 300 millimeter fabs.

Thank you, guys.

Thank you. Our next question comes from Daniel Berenbaum of Susquehanna Financial Group.

A quick housekeeping question, just to clarify, does your GAAP EPS guidance include that 3 million from discontinued ops and then the pro forma does not include that? Am I understanding that correctly?

No, the -- both the pro forma and GAAP do include that.

Both pro forma and GAAP do include the 3 million?

Correct. The 3 million. The only thing that's not included in pro forma is any restructuring costs or any amortization costs at this point. That's the only two things that are excluded. So it's amortization of goodwill and this is a small amount of restructuring as we trickle off some people as we close down some of the closures on the final sites. Everything else is all in.

Great, that's helpful. When you talk about the 45% drop through that you expect from the model, does that include some of these cost reduction programs that you have in place? And then maybe can you be a little more--?

No, no that's--.

That's just what's in the model now?

Yes, that's just what's in the model now.

So, maybe can you comment where it could be if some of these cost reductions come through within the next year?

I'd rather quantify that as we get another quarter out. I think as Ed said, we've got the two big things that we look forward to, initiative wise, as a Series 9 gets rolled into our customer base, that will have change. That's somewhat dependent on how people, what rate of pace people will transition into that product. It's a little bit out of control at this point, that's why I don't want to guide to that. And additionally, as Ed said we do have -- we're kicking off a major initiative. We've just hired a sourcing manager and we look forward to sourcing additional componentry in Asia. But as you well know that if you're going to start to do that, we hope to be in some contractual form of that before the start of the calendar year. It's going to take at least six months before we can see benefits of that. So give us about a quarter and we'll help you adjust, one to two quarters we'll adjust it out.

Okay, thanks.

We will get some benefit in Mexico after this quarter as well, but that will be -- it's not even a 1% change, maybe 0.5% change.

Okay. Great, thanks. That's very helpful.

Thank you, sir. Our next question comes from Timothy Arcuri of Citigroup. Please proceed with your question, sir.

Hi. Thanks a lot. Actually, one for Bob and one for Ed, I guess this is for Bob. What is the NOL today, Bob? And what's the balance sheet writeback, if you were to write it back today?

Would have to look at the exact number, Tim, as we true up, but roughly, again there's two sets of numbers there. The NOL is probably approximated because of the earnings this year, probably 625, $630 million. But we'll true that up as we get to the 10-K. That would have a balance sheet impact, if we converted that over, in excess of 200 million.

Okay. So what do the auditors want from you to get that put back on the balance sheet?

If the year of '07, as we enter our fiscal '07, we will not bring that into the balance -- bring that into the back -- off the balance sheet into P&L, it will take another year of earnings?

So there's no way that that will be brought back during fiscal '07?

Correct.

And last thing. This is probably a difficult question, Ed, but what portion of products -- so if you were to draw a line between the old products, the old lower Legacy margin products and the newer higher-margin products, what's the breakout between the new higher-margin products in terms of revenue? It seems to me like the margins, given that we've seen kind of a pretty good mix shift towards some of these new higher margin products, it seems to me like margins should be a smidge better than they are in December given how good some of these new -- how high the margins are on some of these new products, thanks.

Tim, I think the answer is simply that the percentage of new products, it's in the 10 to 15% level, something like that right now. It's not a significant impact because, remember, the design in win and ramp to volume on those new products is taking time and most of the customer base is, even in vacuum systems has ramped on what I will call Legacy design products. So the newer products are just beginning to ramp. And as Bob said we've confirmed, the Series 9 stuff is probably going to begin to ramp in the back half of '07. The vacuum products will begin to ramp more towards the front half. So as a percentage of total revenue, I expect the percentage of total revenue will probably double throughout the year, but that's about all you'll see. There's a tremendous -- again, the resistance to change in the customer base is very high because they can't afford to go through that white paper change process at their customers, so a lot of Legacy stays in place a lot longer than any of us would like it to.

Also -- you have to look at too, the volume of Synetics is picking up, and if you looked at again, we're a little bit of a moving target, where we just picked up Synetics, which as you know, in that model is a lower margin. If we did not have Synetics this quarter, we would have finally crossed that, we would have been 40.1% in traditional Brooks' gross margin. But I think as Ed said before, looking at our 11% operating income is the right measure as you look at the business going forward. But you're going to see some permutations for a couple of quarters here. Again, you're going to lose the benefit of the software mix, you're going to gain the different shift in mix in Synetics, but still the operating line still stays virtually the same at 11%.

The key, Tim, is gross margin is not the right metric for this company.

No, I know. Ed, I hear you say that, but most companies -- most traditional financial analysis relies on gross margin. Gross margin is pretty important in terms of the leverage of the business, so I guess I'm just--.

Tim, I understand that and what we're trying to say to you is you can do the mindless stuff if you want to, but the fact is if you want to understand Brooks, you have to do revenue, operating margin, and free cash flow. If you want to look at gross margin and we let you do it, that's your choice, you're not going to get the right answer for Brooks.

Okay. Well, I guess, last question. Can you envision a scenario where gross margin is -- with the Company as it currently stands, gross margin has a 4 in front of it?

Yes, I can see that--.

Some day.

I can see that in a 24 month window, yes, can , I can.

Thanks, guys.

Thank you very much, Mr. Arcuri. Our next question comes from CJ Muse of Lehman Brothers.

Just a couple quick questions here, looks like hardware X Synetics bookings declined about 10% Q on Q. I was hoping you could comment on whether that surprised you, whether there were any pushouts, delays, cancellations?

No, not really. Last quarter, we had an uptick, I think it's from timing of orders, we actually had virtually the identical dollar spread where we were over on those quarters last quarter on a bookings to revenue line. So eventually, you can't continue to increase backlog forever. So net, net, it's what we expected to see and we continue to see decent momentum into this quarter.

Okay. In terms of the comments of seeing some softness, does that suggest that we should trend around current numbers, or could we see additional softness?

I would say flattish. Is it going to be -- I don't think that there's much plus side. Clearly we've been running at peak here for the last couple of quarters and we see that continuing, but I don't see -- if I take flattish and I see not a whole lot of upside to flattish, if anything, you might see a tweak in a negative direction a couple of points. A couple points up to 10 points down would be reasonable to model in, but I think we're saying flattish is the appropriate way to look at bookings going forward, at least for the next quarter.

All right. Last question, as you look to your fiscal '07 and these new products coming onboard, can you put a ballpark figure as what percentage of the mix, either for the year or as you exit the year will be new products?

Yes, I think I just said a minute ago, it's about 10 to 12% right now, we expect that to double by the end of the year.

Okay. I didn't catch the 10 to 12.

Sorry about that.

Thanks.

Our next question comes from David Duley of Merriman.

Nice quarter. A quick clarification. I thought I recall you guys guiding overall bookings to be flat and I wasn't sure if that included Synetics or not. Maybe you could just comment on the order number. Was that number a little bit better than you thought or in-line?

About in-line with what we expected, David.

Okay. So your order guidance then flattish was for your core business?

Yes.

Okay, got you. Now, when you basically take out all the moving parts here, you're guiding your core business roughly flat sequentially on the revenue front. I wasn't certainly expecting to see a downtick. I was wondering if you could tell me which areas of your businesses are showing a little bit better metrics than they were several months ago?

I would say vacuum products is really been the star for '06 and appears to be the star going forward. And that's gains in share. It's new design wins at a number of customers, the whole vacuum automation, the move from components to system level has been a big up for us and we are just doing extremely well in that space.

This is Jim Gentilcore, David. The vacuum automation systems are proving the outsourcing model that we -- as we've said a few times, we're seeing it increase across all the OEMs, but it's particularly strong in the vacuum systems for mid-sized OEMs and that's really carrying us with momentum into this quarter.

And I think, David, just to add, if you want to get a futures on that, one of the reasons we're so bullish on vacuum systems is the response off Japan after the joint venture announcement and the new opening ceremony was just an amazing number of calls and customer contacts of customers who were after and trying to get access to the Brooks proprietary vacuum technology. That is playing out exceptionally well for us.

Okay. And Bob, one quick question, you mentioned that inventory was up and you said as expected because you kind of implied that you might have better than expected -- why was inventory up? Could you give us a little more detail there? And then one follow-up, kind of follow-on, why would we still be forecasting fairly significant legals in December and March if the option investigation is behind us? Is that just because you deferred the expenses, or how does that work?

Going to the inventory, two major things in inventory. The purchase of Synetics with the timing of that deal, they had actually very low levels of inventory. That was probably two-thirds of the bill for the quarter. Additionally, as we -- I think we talked about on this call, the CTI facility will close, so we have built up some inventory in Mexico for the prep to switch over to the Mexico facilities. So just being smart on transition. In fact, a lot of those folks moved up his week onto the Chelmsford campus. It was a prebuild, because as we move we're going to have downed factories for a couple of days for that. That's why that was planned. As far as the legal, we're taking a conservative approach. As we spend out in looking at addressing legal issues on derivative actions, things like that, and as the agencies continue to review things, we're spending dollars there. So again, we're taking a conservative approach and expect to take that to the P&L.

How much excess -- or how much inventory -- how much did this inventory build impact cash flow? Maybe a quarter or two from now, will we get 4 or $5 million more out of inventory, $10 million or--?

Yes, I'm hoping next year, that -- we finished the year at 100 million of inventory, as you well know of, we battled this quite a ways, but I'm looking for at least a $10 million reduction into this next year. I'm looking for actually more, but I think we'll commit to at least 10. Turns is still in pretty good shape. DSOs are at 54 and turns are in excess of 5, but I think the guys have done a pretty good job. Can we improve from that? Absolutely.

Final question from me. You mentioned I think a couple of customers this time were over 10%. Could you just give us percentages?

One was 13, one was 10. That's in sequential, and alphabetical order.

Thanks.

Thank you, Mr. Duley. Our next question comes from Jay Deahna of JP Morgan. Please proceed with your question.

Hi, this is [Jennie Yun] in for Jay Deahna. A quick question. Last quarter, you had announced a major design win with your Mag 8 robot at a large OEM and I think you said the volume was ramping. Can you give us some more detail there, maybe the size and the timing of the revenue opportunity?

That revenue opportunity has begun this quarter and I'm not sure I want to really discuss the absolute number, but it's -- let me put it this way, it's a substantial number of units being shipped this quarter and continuing to ramp into next quarter. Sorry I can't give you an exact number.

Okay. Then just a clarification, when you were talking about your pro forma EPS guidance for next quarter, you said you excluded restructuring and amortization, is that also excluding stock comp expense?

No, stock comp is moved back up. Because many of you -- this year we excluded in our pro forma data this past year, in our pro forma we excluded stock option expense. Since many of you have converted your models and include it in regular earnings now, we've moved it back up into -- it's in GAAP and it's in pro -- it's not excluded in pro forma anymore.

Okay, thank you.

Thank you, ma'am. Our next question comes from Satya Kumar of Credit Suisse. Please proceed with your question.

Hi, thanks. The Yaskawa acquisition, when was the exact date of close, JV, sorry?

The JV -- the start-up? We didn't close, the start-up? We closed the Synetics transaction June 30.

Right, when do you start including the Yaskawa JV revenues? Is it included in the December guidance?

Yes -- no.

Was it there in September? I'm trying to get an apples to apples for December.

We will not consolidate that JV.

Okay.

The revenues in the September quarter to Japan went directly from Brooks to Japanese customers. The JV has been started up into this quarter. What will happen will be, we'll continue to fulfill from Brooks directly through. You won't see a change in revenues because of the JV. We will now ship -- what happened in the September Q is Brooks stock shipped to customer docks in Japan. What will happen next quarter is, Brooks' dock will go to the JV dock and then the JV will pass over to the customer. We will take revenue when it goes to the JV stock. You will not see a transition point or inflection point up or down.

Okay, got it. And the 33, 34% gross margin guidance includes the impact of the slightly lower margins from that JV and also from the -- but it does not include the impact of the software business?

Does not include software, correct. And you really won't get lower -- you'll get a slight discount as we sell into the JV, but it's almost immeasurable. So that's reflective of the hardware business with actually a little bit more revenue coming out of the Synetics side. So that's why that margin is rounding down a little bit.

So I'm just -- sorry.

Are you clear that the 32 to 34 excludes the software?

Oh, it already excludes software, that makes sense. The amortization expenses that you had in the September quarter and you're guiding to going forward, is that a more of a recurring expense going forward, or is this something that will go away after a couple of quarters?

The amortization of intangibles?

Right.

No, that will stay for a couple of years. That number principally is due to the Helix acquisition.

Okay. And the additional SG&A from the option expense review, that should start coming down from the March quarter?

At this time, I would model it through the year.

Okay.

I would model about $1.5 million through next year. We have derivative suits, we have other, we have a host of lawsuits that you're all familiar with. Again, we're taking a conservative position saying we're going to expense those legal charges. As you look at FAS 5 accounting, it says if there's any contingent liabilities out there, we should expense those legal fees and that's what we're doing to do.

I just wanted to get my arms around all the moving parts once again, from looking at the fourth quarter guidance to fourth quarter '07, if you can just help me understand if this map makes sense. You talked about the Yaskawa potentially adding something like 10 or $15 million in incremental opportunity in a year's time frame, potentially the robotics adding maybe 2 to $3 million and the same for Synetics. If I add it all up, I should get some kind of an organic growth of $30 million or so on a quarterly run rate from now to the end of next year regardless of what happens to the cycle is that sort of a reasonable math to you?

Pretty good math.

Okay. These incremental revenues, what kind of a drop through of gross margin -- or operating margin should we think of in modeling these into next year?

45.

45% drop through.

And I'm just trying to understand the 45% drop through, because the Synetics and the service portions clearly come in at maybe mid-20s gross margin?

Yes, but the incremental is still at 45.

Even on those businesses?

Yes.

Okay, thank you.

It's lower on Synetics than that, but if you're going to dissect the model at that level, you get different ratios, but service and hardware you should do at 45. If you look at Synetics, probably look at 30 -- 30%. We're not going to be guiding at that level of detail. We're running the business as a hardware company, but if you're trying to tweak your model to a very precise level, whatever you want to do for Synetics, 30, and 45 for the balance.

Great. Helpful, thank you.

Thank you, sir. Our next question comes from Peter Kim of Deutsche Bank.

Hi, thanks for taking my call. Could you give us your backlog number now that you've ended your fiscal year?

Yes, I can. The backlog at the end of the year is $135 million.

$135 million. And does that include additional -- because--?

I'm sorry, I'm sorry I gave you the wrong number, it's none of those -- bad number, 181 million, I'm sorry. 181 million, and that does include software. If you just look at hardware, it's 152 million.

So, of course, you're going to take the software component out?

Correct.

And do you include the service in your backlog?

Yes. If there's an order, if there's an order that's been placed.

Like service contracts?

Yes, if it's a service contract that's going to run for the next 12 months that's already been placed, that's in our backlog.

Right. And I think last quarter you said that service, you're currently running in about 5 to 8% of your hardware business, so now that you're segmenting out software, we should expect your service to run at that level consistently?

Percentage will obviously increase as we take out that piece of the business.

Our service, our GCS business, if you will, is currently running in excess of $100 million run rate annual.

Okay. Great. Thank you.

Thank you, Mr. Kim. Our next question comes from Colin McArdle of Needham & Company. Please proceed with your question.

Good evening. Thanks for taking my question. Given the successful integration of Helix and the cash infusion after the sale of the software business, I wondered what you -- how would you qualify your appetite for acquisitions and maybe what criteria would you use? And then secondly, does a -- do additional joint ventures make sense in breaking into other geographic areas?

I think the answer, very simply is, Bob and I are not very strong -- I think the management team here does not have an appetite for M&A transactions. We opportunistically look at things as they become available, but clearly we are not -- we're not on a binge to go buy stuff. That's not where we are. We're going to look at better ways to use the cash.

We want to do transactions, as we've said before -- if opportunities come up that are accretive and hit the strategic nature of the Company, we'll obviously look at them. So again, the model would be, if there are deals and it's accretive -- as far as future JVs, in all honesty, and I think we've said this, initially when we started the discussion with the Yaskawa, we were diabolically opposed to doing a JV and as we all sat down, in fact, it was our recommendation that we end up with a JV structure as we fought through all of the dynamics within that part of the world. So again, how you set that up depends on the situation and the circumstance. But we started on a path where both parties were, let's not do a JV, let's do it in a different format and we all absolutely agreed that the JV was the best structure for that transaction. So it's not you look for JVs or not -- you look for opportunities to grow your business in the right strategic areas that have the right strategic properties and are accretive. And how you structure that, that's just a financial mechanic.

Okay. In terms of uses of cash alternative, would you share the chronology for retiring debt and what your thoughts are on share buybacks?

Well, first and foremost, retiring debt has already been done. That was an easy one. As far as doing share buyback been done. That was an easy one. As far as doing share buyback or something like that, we have engaged -- we actually had a Board meeting today, we've had dialogues with the Board, the Board is very interested in seeing what we do, there's been no decisions at this time, but we're looking at what to do. We just announced a very large sale or potential sale, it's not closed yet of the software business, so I think as the next few quarters play out, we're going to think methodically what to do with that cash and what the best use to the shareholders would be. I think you'll see something during the course of this year, but again, we're not announcing something Monday and going to announce another thing on Friday.

Okay, thank you.

Thank you. And our next question comes from Mark FitzGerald of BOA Securities. Please proceed with your question.

Thanks. I was just curious how much of your sales right now are going into Japan?

Not much.

30 million-ish.

Hold on a second, we'll give you an exact number, Mark.

Is that mostly Synetics?

No, no. That's Brooks sales. Synetics doesn't sell into Japan.

It's actually a little higher than that. It's actually 48 million -- $48 million for the year. Hardware and software.

And as this ramps for you, is there any risk that the Japanese business is going to be lower margins just because of the way people do business in Japan, or is that not an issue as far as you see right now?

I think the answer that we have from our partner is they don't see it as an issue, we don't see it as an issue. The demand is for the proprietary vacuum technology that the direct drive robotics and I think we can maintain our pricing in country in Japan and I think our partner believes that as well. There's just an insatiable demand for it right now.

So you don't have to put more additional support, or typically there's a lot of support that has to go along with breaking into Japan. That's not an issue?

No. As a matter of fact, that's why -- that's what Yaskawa does. Yaskawa's got a tremendous infrastructure that helps us do that at no additional cost.

That's exactly why we did the JV.

Okay. And just on the modeling issue, is the software thing going to be done this quarter in terms of the one line item?

It's going to -- well -- what happens is the one line item will say income from discontinued option this quarter, and that will be whatever the operating income is for that unit. In the event that it's sold, there will also be a gain attached in that line. And then after that quarter, it would drop off. So after the deal is closed, that line drops off. For modeling purposes, if you want to assume the deal closes by December 31, probably a safe bet. It's got to pass regulatory stuff, Is it going to close December 31, or is it January 10, versus sometime early in that, I can't call that one, but it's approximate timing should be about the end of the calendar year.

And to get your GAAP earnings, you're using 3 million for that line item right now?

Yes.

Okay. Thank you.

Thank you. And our next question comes from Mr. Jim Covello of Goldman Sachs.

This is [Kate Cutlersky] on behalf of Jim Covello. I have a couple of questions. First, just on the housekeeping front, in terms of the tax rate for the remainder of the year is it going to be the same 500,000 that we saw this quarter?

You didn't see 500 this quarter, you saw 5.1 million and we guided 500 for the Q1.

I'm sorry, that's what I meant.

And used that for the balance of the year.

Then just a general question in terms of your nonsemiconductor businesses, can you talk about how much of that business is now targeted towards nonsemiconductor market?

It's a pretty small part of our total business, and we -- we would group -- we typically group semiconductor, data storage, and flat panel, those groups together, but other markets, instrumentation markets primarily from our Grandville/Phillips product lines are relatively small portion of the total revenue.

Do you foresee that being a small portion going forward, or would you consider expanding more significantly into those areas?

No, most of our -- we anticipate that most of the growth will still be in the semiconductor or information-related markets like data storage and flat panel.

One final question. The stock option expense next quarter, is it going to be similar to what it was this quarter?

Yes.

Okay, thank you.

Thank you, ma'am. Our next question comes from [Federico Natelli] of Euro Capital. Please proceed with your question.

Just one question. That is regarding the software division that you just sold, $85 million for the year, 68% gross margin and $25 million the sell price of it, I was surprised to see such a low evaluation for such a fine division. Could you please elaborate on the process that you went through in evaluating such division and selling it?

Sure. We actually went out and did an auction and a bid on that, had several companies look at it. I think if you look at software multiples, the business sold for about 1.5 times revenue. Keep in mind there is no cash. If you look at and dissect the transaction summaries of software deals you will see multiples of 2 to 2.5 times revenue, however most are enterprises that have full balance sheets with full cash et cetera. This is an enterprise that's being sold for virtually, net assets are about zero when you consider there are receivables, but there's also some deferred revenue that moves over. The book on it is effectively goodwill. I think you need to be cautious, that's actually -- I would say a very good price for the business and again, we had probably six to -- there were eight people at the start of the process, six people into the finish of the process, and all ranging very, very close. But again, I'd point you back to look at enterprise, and if you compare that data -- it also has operating income by the way, of $6 million in the last year and if you look at multiples of EBITDA, I think you'll also see that it is tracking in line with transaction summaries if you factor cash out of those other summaries.

I understand. You think that selling to Applied, the software division that would maybe produce -- because they would adopt your software, maybe that would help the sale of hardware in the future?

We're not -- we know that Applied is combining this with some other software products that they have. We believe that it creates critical mass, which is important to the continued success of the software business and we think that Applied is very interested in continuing and investing in that software business. As a matter of fact, I think in their mission statement or on their web page, you can find how they believe it's a growth opportunity for them but that they needed to get to critical mass to make it a successful business. And we both did, quite honestly.

So there's no potential synergy going into the future?

Synergy in what way?

Well, in the sense that maybe could increase hardware of equipment sales?

For Applied?

Yes.

I don't know what Applied -- you'd have to ask Mike Splinter or the people that run the company what they plan to do or how they plan to leverage it. The good news is we maintain a strong relationship with applied where we continue to have access to any and all of the software products we need to run our business.

I was talking about your equipment.

Oh, our equipment. Like I said, we have access to anything we need that would support, or we would need to sell our current or future products.

Thank you.

Thank you. Our next question comes from [Robert Minor] of CRM.

Simple question, Bob, two questions for you. One, on the interest income rate you're getting on the cash is about 4%, is that accurate?

Probably about right, yes.

And then any idea with a the tax expense, what the interest tax rate would be once you start booking taxes? Have you thought that far in.

Haven't really thought about it yet for the tax rate. It's going to be, I don't know, high 30s, probably, if I had to swagger it going out.

Great, thanks, guys.

Thank you. And our final question comes from Timothy Arcuri of Citigroup once again. Please proceed with your question.

Bob, on taxes as well, it's pretty safe to assume that you're going to be paying a de minimus amount of taxes through certainly all of next year and probably all of '08, is that kind of what you're thinking about right now?

I won't pay taxes -- I hate to say in my lifetime, I hope to live a long life, but Brooks -- even after we bring that tax off the balance sheet, we still will not be a cash taxpayer for any significant time. The $2 million in taxes that show in the P&L, we'll continue to pay those taxes at that rate for realistically seven to eight years before we do. Even if the accounts -- if we have to move that deferred tax asset down, the bookkeeping will be -- you will take a hit to the P&L and you will credit the balance sheet to move that down, but we will not be a taxpayer for seven to eight years.

Yes, okay. Thanks.

Thank you. [OPERATOR INSTRUCTIONS] Gentleman, there appears to be in questions at this time. I would like to turn the call back over to you with a closing statement.

Let me remind you that Brooks will be presenting at three upcoming conferences next week in Austin on Monday and then two conferences in New York City and we'll webcast all three presentations. Thank you for joining us and that concludes our call today.

This concludes the Brooks Automation Inc. conference call. Thank you, everyone, for joining, you may now disconnect.