Azenta Inc (AZTA) 2007 Q1 法說會逐字稿

Good day, and welcome to the Brooks Automation earnings conference. [OPERATOR INSTRUCTIONS]

At this time, I would like to turn the call over to your moderator, Mark Chung, Director of Investor Relations at Brooks Automation. Please go ahead, sir.

Thank you. Good afternoon, and welcome to Brooks Automation's conference call to discuss the results of the first quarter of fiscal year 2007, ended December 31, 2006. The press release announcing the results of the quarter was sent out today 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 of Brooks Automation to request a copy. Today, giving the prepared statements on behalf of the company, are Bob Woodbury, Chief Financial Officer, and Ed Grady, President and Chief Executive Officer. After the final speaker, we will open up the call to questions. Also present on the call to help answer questions, is Jim Gentilcore, who is the Chief Operating Officer of the Semiconductor 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 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. Results for the quarter were pretty much as expected. Orders were $159 million. This was slightly lighter than expectations. However, with the holiday shutdown, both here at Brooks and with our customers, we had approximately $10 million in orders received from two customers that were not included in our bookings, mainly because we had not cleared them through our final review of terms and conditions, as PO's received from the customers had been submitted to us with differing terms. This is fairly standard but again, with both sides having folks away for the holidays, ironing these items out didn't happen in a normal fashion. I mention this as the absolute order number appears lighter than the trends we're seeing from our customers. This $10 million will roll into the March quarter bookings, which we expect to be in the $180 million to $190 million range, leaving our hardware order picture flat to down slightly to where it has been for the last several quarters. Orders, to remind you all, were $184 million in the September quarter and $174 in the June quarter for the hardware business.

Revenues finished at the high end of guidance, closing at $191 million, again pretty much in line to forecast. The higher revenues were principally in our CDA business at Synetics. Our top ten customers accounted for 54% of revenues. We did have two customers with revenues in excess of 10%. On a geographic basis 60% was North America, 15% was Europe, and Asia accounted for 25%. The gross margin as a percentage of sales was 32.4% on a pro forma basis. Margins were a little lower than expected and can be attributed to two things. With the higher CDA shipments there was a mix shift of approximately 100 basis points. And additionally, there were higher transition costs associated with the Mexico transfer, as we finally exited the Mansfield facility at the end of the quarter. To ensure delivering product to customers we incurred additional freight costs as well as increased overtime expense for the period.

In our cost of goods sold for GAAP measurement are amortization of acquired intangibles of $2.3 million, which is broken out on a chart in the press release. Q1 operating expense came in at $42.6 million in line with what we expected spending to be for the quarter. During the quarter the Company had $2 million in net interest income. The tax provision was $600,000. Income from discontinued ops was $5.2 million. In line with what we expected at $3 million, and we also received a settlement of $2.1 million for interest and penalties related to an old PRI tax audit in Canada, which was reserved for several years ago.

Turning to the balance sheet, cash, cash equivalents and marketable securities at the end of the quarter were $184 million, down $7 million from a quarter ago. The major drivers were increased AR of $14 million, as shipments occurred later in the quarter, and incentive payments for the last fiscal year to all our employees for $9 million. DSO's were at 60 days. Inventories were $105.5 million. I do expect a reversal in inventory trends the next couple of quarters. With the factory transitions from Mansfield and Mexico complete, as well as meeting the ramp the last few quarters, we are refocusing our efforts in these areas. Even with the build in inventory, turns are at 4.9 times, which is not unreasonable. However, our objective is to become a leader in this area. Depreciation was $4.4 million, and CapEx was $4 million.

The software business did perform well for the period as you can see from the results. We continue to work with the appropriate regulatory agencies as they review our Hart Scott filings. You may have noticed our release this afternoon where we announced clearance from several international agencies regarding their review of the transaction. We're hopeful and expect at this time to close the deal during the March quarter. For the March quarter we expect results to be relatively consistent with Q1, with revenues, again excluding software, of $185 million to $190 million, gross margins in the 33% to 34% range, R&D of $13 million, SG&A of $30 million, for a total OpEx of $43 million. This does, by the way, include the cost of stock-option expensing under FAS 123. Interest income is expected to be $2 million and taxes of $500,000. Income from disc ops will be $3 million. We will continue to guide on a GAAP basis, and to that end GAAP EPS should be ranging from $0.25 to $0.30, which is before any anticipated gains from the sale of the software business. Amortization of intangible expense will be flat at $3.8 million or roughly $0.05 per share.

Now I will turn it over to Ed.

Thanks, Bob, and thank you for every -- everyone for joining us today. Brooks once again delivered revenue growth and beat earnings guidance for our first fiscal quarter. The continued strength of our business was driven by our core tool automation products and our customer-designed automation business, which came in above plan. We were pleased with this strong performance, which reflects the market share gains at key customer and growing demand for our new products. As noted by our revenue guidance, we expect this momentum to continue into at least Q2, as we grow our leadership position in the market. This is in spite of the fact that the semiconductor industry is entering a period of uncertainty and some likely pull back from its current levels of investment.

While many industry analysts estimate that capital spending could be flat to slightly down in calendar 2007, we believe that Brooks will out perform the industry in 2007. We believe that revenues from our new products will increase to more than 15% of our automation product shipments in 2007, driven by new wins at customers and replacement of our older, lower-margin products, and will continue to rapidly expand from there as a percent of revenue. Brooks has focused our business to be the systems provider to OEMs and support tho -- support of those systems to the semiconductor and related industries. This focus establishes Brooks as a leader in one of the fastest growing segments of the capital equipment as a technology leader with attractive costs, allowing us to realize profitability through the industry cycles.

Looking at the big picture there are four main drivers for the growth in our bus -- base business. Number one, as the industry migrates to smaller design rules, more process steps are required and an increase in the number of new vacuum processes resulting in more tools per 300-millimeter fab. OEMs are accelerating the outsour -- number two, OEM's are outsourcing of their automation at roughly 5% to 7% per year, as the supply base adds strong value to meeting their technical needs, helping reduce their cost structure and allowing them to focus on their core strengths. Brooks has demonstrated critical mass and an integration capability to enable captive-to-merchant conversion. Number three, more customers are moving from modules to full system level integrated proje -- products, which doubles our revenue potential on each tool. Number four, expanding service to Brooks installed base, while adding to the installed base helps grow our service support business. We estimate we have about 18% now of the served available market for service, which is automation plus subsystems, but only a little over 2% of the Brooks tool automation opportunity of $300 million.

Let me touch on some highlights of the quarter that gives some insight to the momentum that Brooks has in the market. In the past year we shipped more than 1,800 atmospheric systems, which are also called equipment front end modules, or EFM, with approximately 600 systems in the December quarter alone. This strong growth reflects momentum of the Synetics business along with the growth of organic products. We shipped about 75 vacuum systems last quarter, increasing from a year ago run rate of about 35 systems per quarter, giving us a clear market leadership in these areas. We made very good progress at a top customer who has told us they are pleased with the delivery and performance of our Mag 8 Vacuum Robot that is now successfully shipping with their new tool. As it ramps in the next few quarters, we believe the magazine high performance and throughput is an important enabler for their success.

We are pleased by our ongoing progress in getting new design-in wins and is gaining share at key accounts with our new products as well as our customer-designed automation business. In Q1 we received orders from three first-time vacuum system customers and three new customers for Vacuum Robots. The pipeline remains strong with over 30 active design-in win opportunities. We recently displaced a North American competitor at a metrology customer with our equipment front end offering from our Synetics division. There continues to be strong interest and increasing demand for our new products from most of the top OEM customers. In January our new [M2Q] vacuum platform was selected by a North American OEM for their new tool. This the platform can deliver up to 375 wafers per hour and expands our target market into strip, RTP, e-beam inspection processes.

We also won at a Japanese I&M plant company with On-Board® IS. At SEMICON® Japan in December we displayed the M2Q and other Brooks offerings with a joint booth with Yaskawa. An indication of the potential of the newly-formed YBA joint venture is that we had over 1,200 inquiries for the Brooks and Yaskawa product set compared to less than 150 inquiries in past years with Brooks as a stand alone in Japan.

To put all of this into context, let me take a minimum to share with you our views on our market position derived from most recent Dataquest estimates of the wafer fab equipment market and our analysis of this data. Our estimates of the tool automation market puts the served available market, which we also call the merchant market, at about $950 million in calendar 2006. This represents about 58% of the total available market for tool automation of about $101.64 billion in 2006. Examining this market further we believe that the vacuum tool automation merchant market is about $220 million and the atmospheric merchant market is about $730 million. We believe that the vacuum automation market is currently 31% outsourced, while the atmospheric market is 79% outsourced. In the past one to two years we have observed an increase in outsourcing where OEMs started to utilize an intermediate strategy, which we call CDA or customer designed automation. This means that OEMs take their designs and give them to a third party to assemble for them.

As a result there's been a subtle shift some market dynamics. Brooks is still clearly the market share leader in both vacuum and atmospheric tool automation. We believe we serve 58% of the vacuum automation merchant market and 39% of the atmospheric merchant market. Overall we believe we have about 43% share of the tool automation merchant market. While we face numerous competitors in the tool automation space, including recent entries by some contract manufacturers, we believe the next nearest competitor has less than 8% of this market, while Brooks continues to gain share. The overall market trend in tool automation is very attractive. We believe over the next five years that outsourcing will increase from the current 58% level to well over 80%. We estimate that the merchant market will grow from $950 million in 2006 to nearly $1.8 billion in five years at a compound annual growth rate of just over 13%. We fully expect the Brooks tool automation business to grow faster than the market by an additional 5%. Furthermore, we expect the vacuum automation opportunity, which is our sweet spot, to increase at a compound annual growth rate of about 25% during that same time. Additionally we expect the service support business to grow at a similar annual growth rate.

From an operational standpoint Brooks management continues to focus on operational mar -- operating margins and generation of free cash from operations as our standard for success. While we believe that gross margins are not the best metric for understanding the Brooks business, we are working on continuously improving margins. We have active efforts under way to further optimized our supply chain and sourcing from low-cost regions, specifically Asia. We have examined this strategy in detail and also consulted with other companies in our industry and others who are sourcing and manufacturing in Asia. We have learned from their experiences and built our strategy to minimize our risk. We are also drawing on our own collective experience, since our Synetics group already has qualified more than seven key suppliers in Asia, and our loadports already are now fully built in Asia and we achieved a significant cost reduction in this product line.

Through these initiatives we have in place and, in addition, the improved cost structure of our new products, we believe we will realize steady leverage through the course of this year and following years, translating into improvements in gross and operating margins and earnings. Our view of 2007 is that it will get off to a strong start, while we take a wait and see approach to the second half. We're tracking 17 new 300-millimeter fabs and 22 expansions for a total of 39 major 300-millimeter projects in 2007. In 2007 -- excuse me -- in 2006, as a basis for comparison, there were twelve new fabs and 17 expansions for a total of 29. Brooks continues to be well positioned with many top semiconductor equipment manufacturing companies as a supplier of choice for modules and increasingly systems. We are excited by the growth in our business driven by the industry trend to outsourcing that helps expand our served market, our market share gains and ramping of our new atmospheric and vacuum products. We also focus on improving costs through leveraging a low-cost supply chain and improving our efficiencies. We believe that these market trends and Company initiatives are the right combination of factors to deliver strong value to our customers, shareholders, and employees.

Thank you for your interest in Brooks, and now we will open the call for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Jim Covello, Goldman Sachs.

Hey, guys, good afternoon. Thanks so much. Quick question. Just on the segment split of spending that could happen for the rest of the year, is there a breakdown of market spending as we go through 2007 that is going to be more advantageous or less advantageous? And when I say that -- for Brooks -- and when I say I mean there's obviously a lot of debate about -- maybe memory spending some of your customers have indicated is going to slow down, but maybe some of the foundry and logic is going to pick up. Does your bene -- does business benefit on a relative basis of either of those segments is stronger or weaker?

I'd say, Jim, that the -- historically we may have had a greater bias towards some of the memory spending, but with some of the new gains that we've had with new customers and some of the new large customer wins, I'd say we're pretty much agnostic to whether it's memory or logic.

And then just relative to -- historically in an upturn, you guys -- the subcomponent suppliers have seen exacerbated cycles one way or the other in in an upturn or a downturn, and your contention from the call is that because of market share gains and your market positioning, you guys shouldn't see the same kind of fluctuations in this cycle that you've seen in previous cycles?

I think that what we really believe is that we're gaining share, even in a down market, because of the new products that we're bringing to market. So I think we have offset any change or any degradation in the current market with share gains and those should be sustainable through the upturn.

And the downturn, you mean?

Yes.

If there were one. Okay. Final question for me is inventories obviously been an issue also in previous cycles, where when your customer shipments was tight it would build up a little and obviously draw that down when things weaken up a little bit. Is your sense that that's being managed a little tighter this cycle so you don't have the same inventory issues that your customers --?

I think the an -- if you're talking about their time to -- their cycle time with us, Jim, we're on a very short cycle time for deliveries. As a matter of fact, cycle times have become almost within a quarter. We're almost on a turns business now with few exceptions, so we don't see big inventory builds. What I can't tell you, though, Jim, is whether our customers are building spec equipment. That's the piece that's a black box for us. We don't know that.

Right. Okay, terrific. Listen, thanks so much.

Our next question comes from Jenny Hsu, JPMorgan.

Hi. Could you give us the stock-comp expense and allocation for it as well as any tax benefit, if there was any for it?

There's no tax benefit for it, and -- bear with us a minute, Jenny. The stock comp was -- it's embedded in the numbers. It's about $1.3 million.

Okay.

I don't have a breakout of where it is, how much is OpEx or whatever. We --

Can we keep it consistent with --

It's consistent with where it was last quarter, yes.

Okay. Also, did you have any push-outs or pull-ins for orders last quarter, and have you had any for this quarter?

No, I don't think we've had any movement at all. If anything, it's just been business as usual with, I guess the exception, as Bob noted, that everybody took kind of a Christmas shutdown time.

Okay. Just kind of in general was the tone of your OEM customers today relative to last quarter?

It's a -- really a bit of a mix. We've had a couple -- we've had several customers with asking us to be sure we're ready for an upside in their business, and we've had a couple who have said that maybe they're going to be a little light. On average we think we're up, but back to Jim's question earlier, those may or may not be device-type specific.

Okay, great. Thanks.

Our next question comes from C.J. Muse, Lehman Brothers.

Yes, good evening. A couple questions here. First off, Ed, in terms of the strong bookings guide, does that just give you visibility to March in terms of really being a turns business or does that provide anything for you in terms of June?

Really just March.

Yes, it's a carry over, too. Keep in mind the component of -- the $159 million had that $10 million, so you're really looking at -- if you factor that in, you're look it at call it a $170 million December Q and then a $170 million to $180 million, so don't -- keep in mind that when you look at that data point that it's relatively flat.

All right.

You could take four quarters in a row and look at $174 million, $184 million, $170ish million, $180ish million, so they're pretty flat right now for four quarters.

Got you. I guess you talked about, I guess, perhaps a cautious tone for the second half. Two of your top three customers have said that mix for revenue is likely weighted 55%, 60% to the first half versus the second half, which if you were to follow that trend your revenues would get down to close to $160 million in the second half. Is that something that you're comfortable with? Is that too low in your mind?

Of course we don't like $160 million. We don't like that number at all. [LAUGHTER] But I think, again, the market share gains that we are achieving in the first half hopefully will carry through and moderate any down cycle that might happen in the second half.

Great. Thanks, Ed. Oh, one question for you, Bob. The one time charges for the pro forma, can you tell us where they are in terms of gross margin and other?

Yes, it's in the table in the press release. The only one-time charge we have from a continuing side is that -- is the $3.8 million in amortization, and -- bear with me for a minute -- the table will show you $2.3 million is above cost of sales and about $1.5 million is in the operating side.

So it's the same for the March quarter?

Be the same for the Mar -- yes. And gain when we speak pro forma you can see that table. The only other thing to factor in, too, is just when you consider disc ops, keep in mind that $5 million it was the -- software did perform where we expected, and we did get that benefit that flowed into the quarter for a couple million bucks for that tax settlement.

Okay. Great. Thank you.

We'll now go to Timothy Arcuri, Citigroup.

This is [inaudible] calling for Timothy Arcuri. My first question is what would you characterize as the leverage out of all the deals that you have done? Is it operating margin, gross margin or what else?

I guess I'm not -- could you clarify the question a little bit more?

Right.

Well, you said -- on the Helix acquisition we said we would get $10 million in synergies the first year, $15 million the second year and still tracking to that. That's probably the only comment we made on any of, quote, synergies that we do in deals.

But would you char -- would you say that the gross margin, for example, as sort of a syn --

I don't believe we had any presumed synergies in the Helix deal of that $10 million or $15 million. Insignificant was in the operating side. Most of it was in operating expense.

Right.

There was a little bit for some building allocation, as we exited the building.

I think if you're trying to get to the point of the dilution in the gross margins, that's been built into our numbers. Is that what you're asking about?

No. I'm actually -- that's part of the question, but I'm just asking about the logic of the deals in terms of one would be cost synergies, other reasons might be gross margin or operation and operating margin impact?

Both deals were put together for somewhat different purposes, but all focused around what we call this system -- being the system provider. In the case of the Helix business, we clearly wanted to have more access to a greater set of components that go into the system level -- the system level product that we're providing, so that's product level. The other part, which is probably the most important part of the whole Helix transaction, was to be able to mimic the successful service model and apply that to our install base from Brooks. As I said in my remarks, there's over a $300 million service opportunity sitting out there for us to take advantage of if we can get, and as we pursue the new service model that we've employed, so that's the huge benefit there.

On the Synetics Yaskawa transaction there were two major benefi -- two major reasons for that. One was getting into the Japanese market. Again we had a small market share there, and by combining with Yaskawa. who's a well-known, well-named supplier in Japan, we're able to leverage our best set of products, our vacuum products, into the Japanese market. And with Synetics it just became an opportunity for us to grow and create this opportunity for customers to be able to move their atmospheric systems to us through this CDA model. So ultimately it's a cost benefit to our customers by allowing them to get rid of the fixed costs, allow Brooks to build those, and the next cycle around, when they need a new tool, Brooks will have the core technology available to build those products as full systems. Again, the whole purpose of all of these transactions is to become the premier supplier of system level products.

Okay. Thanks for clarifying that.

Okay, thank you.

I have one more follow-up. Quick follow-up. When you were just talking about Yaskawa joint venture, now the -- would you say that the gross margin of products sold through that is similar to what was sit sold outside the JV? That is, has there been any impact to gross margins as a result of the transaction?

No. No. They'll be the same.

Okay, and the on --

Thank you.

I think we have a long line of questions. You can come on at the end of the call if we have time. Thank you. We'll take the next question, please.

Our next question is from Steve O'Rourke, Deutsche Bank.

Hi, good afternoon.

Hi, Steve.

How and when do these large number of inquiries in Japan translate to meaningful orders?

Well, I tell you, Steve, it's -- you've done SEMICON yourself I'm sure in the past, and I think the reason we said the large numbers is just to demonstrate the amount of traffic and the amount of people we had through the booth. I'd say the answer is it's a design-in cycle, can be 18 months, kind of that range. Could be some fast design-ins. We've got a couple of opportunities for fast design-ins, could materialize in the next ten to 12 months, but I'd say generally in 18 months.

Okay. Is this some -- can you speak at all to traction with Tokyo Electron, the largest equipment supplier over there?

The only thing I can really say is that we are able to have very, very productive discussions with them now as part of the joint venture.

Okay. One other question, when you look at one, two years, do you see anything coming from say 300-millimeter prime, and how can this benefit Brooks?

You know, it's interesting. We kind of take a little bit of credit for 300-millimeter prime. We put this together several years ago as a proposal and have developed a lot of technology there. I believe it could be a significant opportunity for us. We will be presenting a paper, I believe, in March discussing our proposals on 300-millimeter prime, and again. I'd say it's an opportunity for us to expand the business.

Is that something that can could begin in '07 or is this really a couple years away?

I think it's a couple years away.

Fair enough. Thank you.

We'll now go to Daniel Berenbaum, Susquehanna Financial Group.

Hi, good evening. Thanks for taking my call. Quick question on gross margin guidance, 33% to 34%, is that pro forma or GAAP?

That's pro forma.

That's pro forma --

Yes, if you look at the press release, it's -- that only GAAP number will be the amortization. The only difference in our guidance is the amortization of $3.8 million, which $2.3, Dan, will sit above when we report -- above the line.

Okay, great. That's helpful. Then in terms of your operating margin moving through the year, both OpEx and gross margin, how do you see that trending? How do you see drop-through to the bottom line through the year? And then how much of any expected improvement would be from a mix shift more towards service or from just improvement in your gross margins in the core tool automation business?

Well, if you talk through -- just look at spend for a minute. Operating expense. I see it staying flat for the rest of the year. We've been fairly flat. Actually when you see the breakout in the Q, it's going to describe pretty articulately what the change between the Synetics deal coming online and some of the variable comp, I think you'll see a lot of the synergies that we've had year over year, so -- but our vision is that it's a $43 million spend, if you will, on OpEx. As you go out further in the year, a lot of it's going to be mix dependent. The CDA business is going to drop through about 20% through the gross margin line as that volumes climbs.

Okay, so --

We've always said the plus and minus of the rest of the hardware business, if you will, is about 45% to 50% drop-through, so on how you gauge up or down the revenue, again for traditional hardware without CDA.

And then what about service?

That will be the same spread -- the same delta spread with service, so the 45% to 50% delta range for service will still stay the same.

Okay.

Incrementally.

Right, right, right.

Not the total margins. Our service margins are obviously lower than that, but the incremental side of that will be in the same range.

Okay. And then did you break out what service or CDA is as a percentage of total revenue?

Service or CDA?

If you'd care to break out both, that would be great.

No, we don't -- we don't break that out.

Okay.

We report now in one segment. We are contemplating if we can get the data to see, but we look at the business as a hard -- we're a hardware business, so for this point we don't break that out.

Okay, fair enough. Thanks.

Our next question comes from Tim Summers, Stanford Financial Group.

Yes, thank you for taking my question. Bob, on the increase in the CDA business, was that all bluebird business or were you tracking that through the quarter?

Well, it was kind of tracking through the quarter, but we just got more out as it's -- again a high turns business, so turnable during the quarter.

Okay. And then on the YEC JV, do you anticipate generating material business in the JV or through the JV by the end of this fiscal year?

No. I think we've actually even chatted about that. I don't expect any additional revenues in our fiscal '07 year for that. Again, if you understand -- as Ed said, at SEMICON Japan, a lot of people in a booth talking. If you understand the design-in cycle, we've got a group of engineers from our side and from customers' side having dialogues about concepts, turning those concepts into being a product that has to be put on their tool. And I think as Ed said, that's an 18-month process, really at the low end of the spectrum. It takes some time, so not an '07 event.

So that JV will basically have no impact on the P&L going forward, for all intents and purposes?

Correct. Not for this year, yes.

This is Jim Gentilcore, Tim. Just to give some qualitative feel for what is actually happening in Japan, by bringing Yaskawa and Brooks together where we cover the entire automation system now, you can imagine that we're getting a lot more involvement with the engineering teams at the OEM, so that's very positive. But as we've said very clearly, that doesn't amount to immediate business until the design-in wins are worked through. So we've been much more engaged with the development teams of the Japanese OEMs than we ever were in the past as a stand alone, but we're going to have to be patient for the outcome.

Okay. Thanks, Jim.

Our next question comes from Mark FitzGerald, Banc of America Securities.

I'm not sure if you give the breakout any more but I would be curious on OEM versus end users for the hardware business?

We don't break that out any more, Mark. And truthfully what used to be called the end-user business for Brooks, there isn't a whole lot there any more. Our AMHS business is really a subset of service now, which is to do support and repair and maintenance of existing installs.

So you say basically then we assume just about all of it to the OEMs, even the EFM's?

Even the -- that's right. That's right. Right.

Okay. And I'm curious in terms of your work on vacuum and getting some vacuum business in the North America marketplace, are you -- in terms of this 18-month time rise in terms of getting qualified, do you have a pipeline full of potential business that comes on in the next 12 months that will be new for U.S. OEMs?

Absolutely. As a matter of fact in the remarks, Mark, what I said is that we have three that happened this past quarter and we've got like 30 in the pipeline right now that this is kind of an ongoing -- Jim do you want to comment on that?

Yes, I would just say that they're a lot further down the pipeline than the Ja -- we were just trying to clarify the Japanese pipeline, Mark, as a different dynamic. But the 30 that Ed mentioned in his prepared remarks, many of them are heading towards the end of pipe, the right end of the pipe.

And then one final question on the Helix cryopump business, do you guys see any intensified competition coming out of Japan?

es, we -- the cryopump business has always had competitors from Japan and from Europe. Whether it's more intensi -- we don't see more competitors. We see strong competition, but -- as we always have, but I think the combination of the value that we've brought for a long, long time to the end-users directly, the successful service model, and the new products that are proving themselves in the marketplace -- Ed talked about the new product as a percentage of revenue for our automation products. Well, in cryopumps it's even higher than that as the On-Board® IS has really penetrated PVD and implant to the fullest. So there are noteworthy competitors out there, but we believe that we can continue to stem the tide.

Thank you.

We'll now go to Darice Liu, Maxim Group.

Good afternoon, guys. Bob, you have quite a bit of cash on your balance sheet and I know that you've been mulling over what to do with it. Do you have any decisions yet?

No. Actually it was a very good discussion at our board meeting this past week. I think it was well received. Clearly doing something with it is part of our financial strategy, so the board has actually asked for some additional analysis before coming to any final conclusions, but I am kind of optimistic we'll get there sooner than later. We're having pretty good dialogues with the board about alternative methods or as to what we can do with capital structure, things along those lines.

And any of those decisions point to go a buy back or a dividend?

Yes. Yes, absolutely.

Okay. And then in terms of just gleaning costs, Mexico's up and running, your new products are start to go ramp. What else are you guys doing to glean the cost structure? More outsourcing to go other areas?

Yes. I think in my remarks I talked about our sourcing strategy -- our low-cost region sourcing strategy, and we've already done that with our loadport product. 6M's are all built in Asia right now, and we have great success with Synetics in China right now. So we're leveraging on the successes we have, and we have a very clear program, with a program leader inside the Company that is driving sourcing efforts. We hired a new sourcing person who's come on board, started the first of the year. So a very, very strong effort to continue to drive our costs and drive improvements in gross and operating margins through our sourcing effort.

So just to clarify, everything in Mexico is Helix, and what you've been outsourcing now is more of the core Brooks and the new products from Asia?

That's correct.

Most of the newer products. The newer products have a better -- they were designed to be more readily manufactured by an outsource partner and then more of a standard platform with configurable capabilities, so it lends itself more to that model.

Fair enough. And then, where should we see any of that benefit coming in?

I think our fiscal Q4. Fiscal Q4 this year we should start seeing because, again, we actually did receive orders this quarter from customers for the new product, so that was designed with a better cost cross over point, if you will. The first sets we'll actually manufacture here, as we transition out of the new product labs into manufacturing, but even that will still have a significantly lower cost than our current products. Then with the transition to an out-source supplier that will be in Q4.

And then the variance -- I guess the delta between -- you already have a very low-cost model manufacturing here, moving it to Asia should add what to the margin profile?

100 to -- I think you're going to pick up probably 100 to 200 basis points because when the product is rolled over into the new cost structure, and you'll pick up probably another 100 to 200 basis points through the first half of next year when you're fully up, when you get volume up into the Asia market into the sourcing side.

Fair enough, and then just a quick speculation question. Just doing the back of the envelope math, if I take the midpoint of guidance from revenues as well as margins, as well as putting $2 million interest income, I get about $0.28 if I exclude discontinuing operations. Is that right?

Probably right.

So we're seeing basically flat quarter over quarter?

It's flat, excluding disc ops.

I thought it was $0.28 with disc ops next quarter.

We guided with GAAP $0.25 to $0.30 including disc ops.

That's about $0.05 --

That also includes -- that also includes about the same amount of amortization, so that's -- so the amortization was that, so we guided on a pro forma basis, $0.05 higher than that, so I'm assuming you're excluding disc ops but you're also excluding amortization.

Yes.

That's about right.

Thank you, guys.

Okay, Darice.

[OPERATOR INSTRUCTIONS] We'll go next to David Nierenberg, Nierenberg Investment Management.

Hey, guys, nice quarter.

Thanks, David.

Nice quarter, guys.

Thanks.

Thank you.

I appreciated, Ed, the extended strategic discussion in your opening comments, and I want to make sure that I heard a couple things correctly because I think they're very significant. The first is that combining your market share in the vacuum and atmospherics you estimated that your market share is 39% and that your next largest competitor's market share was only about 8%. Is that correct?

I think it is 39% was for atmospheric. Total was 43%, David.

43% is your total?

Yes. And your competitor is about 8%? Yes, next largest.

Okay, so that says that your relative market share is almost 5.5 times your next largest competitor.

What the numbers we calculated said.

Yes. And then you talked about the growth in the merchant market over five years running from $950 million to $1.8 billion, which would be about a 13% compounded annual growth rate in revenues?

That's right.

And you estimated that the Company might grow perhaps five points faster than the market over that period of time?

For that market segment, yes.

For that market segment. So that says that we're thinking we could be about an 18% compounded top-line grower ore five years with a 5.5 times relative market share. That sounds like a pretty attractive business, especially relative to your current share price?

Yes, let me make sure that we clarify. I would not apply those numbers to the Brooks top line, because keep in mind we've got Synetics and the vacuum products business and the service businesses that are separate. So I'm not saying that you're off a lot, but I would not apply a full 18% to the top line of Brooks. It would be more like 12% to 15%.

So Brooks 12% to 15%?

Yes, the overall Company.

With about 5.5 times relative market share. If Mr. Woodbury keeps his strangle hold on the below-the-line costs and the Company executes as Jim is talking about on your gross margin improvements, one might think that EPS would probably be growing at a faster rate than that topline number?

That's right. It's absolutely right.

Sounds like a good stock to own. Keep up the great work, guys.

Thank you, David.

Thanks, David.

We'll now take a follow-up question from Daniel Berenbaum, Susquehanna.

Yes, hi, guys. Just real quick on gross margin guidance. If I look -- and I just want to make sure I understand this right -- if I'm looking at mid point to revenue guidance, mid point to gross margin guidance sort of implies you have to take about $5 million out of COGS on down revenue. One, am I understanding that correctly? And I know you talked about some of the additional costs incurred in the Mexico transition, is that a realistic number to come out of COGS on down revenue?

Well if you take -- down revenue in the sense we had $191 million.

Right, right. I mean slightly down revenue.

Right. If you come down -- coming down to -- I guided, I think, 33% to 34%.

Yes. If I take mid-point to revenue and mid-point to gross margin guidance.

Right. If you take -- if you look at last quarter, Dan, and you took out the -- I told you it was 100 basis points, so it was about $4 million additional shipments out of Synetics, and that actually impacted a few. If you could have taken that off, you would have had a $187 million quarter with 33% gross margin, the quarter we just reported.

Okay.

On a baseline. And that also we had higher costs, so your math is about right. You're only getting 18% to 20% gross margin on CDA-type business.

Okay. So you basically expect, then. mix to shift back enough away from CDA plus get rid of the transition costs, that's what's going to help you?

Exactly.

Okay. Thank you.

Okay.

And we'll now return to Tim Summers, Stanford Financial Group.

Yes, just to follow up on a comment earlier, are you -- did you say that if the market declines slightly in the second half of calendar 2007 that you think that share gains that you are getting and continue -- should continue to get through the year should pretty much offset that decline, so your business in fact could be flat through the year?

I think that's what we're trying to -- that's what we believe is that if we look at it overall business, that where the share gains are sufficient that we will -- I think the bottom line, Tim, is -- let me get more clear. We believe we'll out perform the market in general. If the market's not a whole lot, the share gains aren't going to completely offset. But if it is down the 3% to 5% being talked about, then potentially we can cover that.

Yes, okay. Good, Ed, thanks.

We have a follow-up question from Timothy Arcuri, Citigroup.

This is [inaudible] again for Timothy Arcuri. Thanks again for taking my call. Could you give an update on the integration so far, how it has proceeded?

We're done.

We're done.

We're done.

That's the answer.

Okay. On the stock-based compensation you have decided not to break it out any more?

No, we've got it -- it's been a flat amount, and most of your colleagues have in their models, they have got it embedded in our costs, so we have not -- but if you look at our -- we actually broke it out on our press release from last quarter, so you can see where that was segmented out. But most of the colleagues -- of your colleagues are including that up above on the line, so we're not breaking it out any more.

Okay. Also the series 9 product, how is the transition to that proceeding?

That's part of the new products where I said that we are growing that to somewhere in excess of 15% of the revenue for that group by the end of this year. That's included in that group, and it seems to be getting good traction.

Okay. That's all I have. Thank you very much.

Thank you.

We'll now go to C.J. Muse, Lehman Brothers.

Yes, a quick question for you regarding your [OVAC] JV. Can you talk about what business trends you're seeing there and how we should think about other income from there, as we proceed through calendar '07?

Yes, C.J., this is Jim Gentilcore. Obviously the OVAC joint venture in Japan is targeted primarily to the flat panel display market, so that -- and we're not -- we don't take revenue there, so the contribution of net income is relatively small, especially now in the total Brooks net income line. But the flat panel display market we expect will be a tough market, so the joint venture has always managed to be profitable, even in the dips of the flat panel market, and we expect that again this year, but not anything significantly different from what we had in previous quarters -- in the previous quarter.

Yes, if you look at -- C.J., if you look at our other income and expense and the minority interest from the JVs those two pretty much offset. Any changes we have in other income, which is typically FX gains and losses, and the other -- the way I think of it is those two for the most part as we model year out almost virtually offset each other.

And are there any opportunities with OVAC on the solar side that you're working on?

Yes. The products -- the cryopumps made by that joint venture actually are used on the products that -- not only that OVAC makes for solar, but some of the other OEMs, some of the smaller OEMs in Japan, so you're kind of tying this back to a question earlier about Japanese competition. There's that, but there's also our effort through our Japanese joint venture, which does get us into some of these markets. Solar, I don't know specifically how many other customers use the OVAC system or -- for solar, but I can't say that our joint venture over there is targeting some of the smaller OEMs that are in specialized markets outside of flat panel display, which would include primarily Japanese players in the solar market, smaller Japanese players.

I guess for solar would you revenue through Yaskawa or would it be through the OVAC JV?

No. The revenue for -- I'm not sure about the question, C.J. The revenue for OVAC joint venture?

No, no, if you're targeting this new market or other ones, would it go through the OVAC JV or would it possibly go through the Yaskawa JV?

Most of it would go through the OVAC JV because the Yaskawa JV is primarily for moving silicon wafers, and the substrates for solar can be a host of different kinds of substrates, so it would most likely go through the OVAC joint venture.

All right. Thank you.

At this time, we have no further questions. I would like to now turn the call back over to Mr. Chung for any additional or closing remarks.

Let me remind you, that Brooks management will be presenting at the Banc of America Securities conference in New York City on Thursday, February the 22nd, and we will be webcasting this presentation. Thank you for joining us, and this concludes our call today.

Once again, ladies and gentlemen, that does conclude today's conference. You may now disconnect.