Azenta Inc (AZTA) 2007 Q3 法說會逐字稿

Good afternoon, and welcome to the Brooks Automation Q3 earnings conference call. Please be aware that today's conference is being recorded and a dial-in replay will be available starting at 7:30 p.m. Eastern Standard time this evening. At this time, I would like to turn the call over to your speaker, Bob Woodbury, Chief Financial Officer. Please go ahead, sir.

Thanks operator. Good afternoon, and welcome to the Brooks Automation conference call to discuss the results of our third quarter, ended June 30th, 2007. The press release announcing the results of the quarter was filed today at approximately 4 p.m. You may obtain a copy of the press release from our investor relations website at investors.Brooks.com or call the investors relations department of Brooks Automation to request a copy. Today making comments are myself and Ed Grady, President and Chief Executive Officer. After Ed finishes his remarks, we will open up the call for questions. Also present on the call to help answer questions is Jim Gentilcore, President and Chief Operating Officer.

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 of our press release titled Safe Harbor Statement and the company's most recent filings with the SEC.

Now to recap the quarter. Orders were $171 million, a little lighter than our expectations but clearly in line. I will remind you that our first half order rates were at $189 million. Last quarter, we benefited from orders that didn't get the paper processed in the December queue as we described both in the December and the March quarters. I know many of you had a 10% down expectation on orders, and I guess what I'm conveying is that in our eyes, we landed where we expected, however, many had estimated that number from a lossy peak. We continue to see the same order levels through the July period, which is reflecting in our current period guidance.

Revenues finished at the low end of guidance range at $190.5 million. The lower orders pushed revenue down to the low end of the range. Our top 10 customers accounted for 58% of revenues and we did have three customers with revenues in excess of 10%. Gross margin as a percentage of sales was 31.4% on a pro forma basis. Q3 operating expense came in at $41.7 million, slightly down from Q2, and right around our expectations. The $41.7 million did have $400,000 in severance expense included in it. Results of all the above was an operating income of $18.1 million or 9.5%, again on a pro forma basis. Interest income was $4.3 million, taxes were $605,000, and other expenses totaled $221,000 for pro forma net income of $21.6 million. Pro forma EPS was $0.28 per share.

We did have some adjustments between GAAP and pro forma comprising of amortization of intangibles of $3.8 million, offset by one-time pickup of $5.1 million for a gain on an investment we had in the subsidiary that we previously owned. The item relates to the Texim business, which we retained an interest in after selling it back to management. They recently merged with a public Swiss company, and the accounting rules dictate that since it is a listed company, that the change requires us to book the gain. I am purposefully excluding it from our pro forma results, as it is a one-time event and since the public company is closely held and has virtually no float. The net is a GAAP net income for the period of $22.8 million or $0.30 per share.

Turning to the balance sheet, cash, cash equivalents and marketable securities at the end of the quarter were $369 million. DSOs were 51 days. Inventories were slightly up, principally at Synetics. As I said and will continue to say, we are putting substantial focus here. Depreciation was $4.2 million, and CapEx was $2.7 million. We did complete our dutch auction in the first week of July. We were successful in tendering 6,060,000 shares at $18.20 for a cash cost of $110 million. As you look to Q4, you should remove these shares from your numbers.

For the September quarter, we adjusted our guidance to reflect the trends we are seeing in the business. Revenues of $160 million to $170 million. Margins in the 27 to 28% range. OpEx at $41.5 million. Additionally, there will be a $3.8 million charge in restructuring as we have started to downsize the operation with a slowdown and there will also be a $3.8 million charge for amortization of intangibles. This leads to a GAAP guidance of a $0.03 loss per share to $0.03 profit per share. Again, this is inclusive in GAAP of $0.11 for amortization and restructuring expenses.

Now I will turn it over to Ed.

Thanks, Bob and thank you, everyone, for joining us today. Until recently, the semi conductor industry has been expanding capacity to meet the high demand for electronic products, especially various memory-intensive products. The result, resulting capital expenditures by semiconductor fabs on process equipment has benefited Brooks Automation as we are the largest supplier of equipment automation products and vacuum cryogenic pumps to the industry. I would like to add some color so you can get the full understanding of market dynamics that led to the results and their impact going forward. I would like to focus on three key areas, first, the market dynamic, second the Brooks results, and third, and importantly, the successes that may be overshadowed by our focus on only the financial metrics.

Let me first remind you that at Brooks we have been consistent in our overall view of an anticipated slowdown or digestion period which we expected to emerge in late 2006 into early 2007. That digestion period is now here. This slowdown in semicapital equipment is driven almost solely by ASP decline in the memory sector. We have all watched this happen over the past several quarters, however, I would point out that ASPs and memory have stabilized this quarter. While the ASPs for memory have declined, the bit volume and overall chip unit volume have continued to grow in triple and double digit rates respectively. There's no question that over capacity installed in 2006 and in the pipeline to come onstream is greater than what's being absorbed by this unit volume growth, particularly in flash and DRAM. This unit volume growth is expected to continue at a rapid pace and will absorb existing capacity now faster than it is coming online. This is confirmed in the fab utilization increases we are seeing.

Unit volume growth is being driven by consumer demand for new devices, particularly handhelds and PCs. Just compare the average PC with Windows XP that had about 700 megabytes of memory on board, compares to a PC with Vista where the average memory is over 1.2 gigabytes. Almost a doubling with the current memory prices, the latter figure is increasing. So how has all of this led to what we are seeing this past quarter? Unit for unit volume growth that drives equipment demand continues to increase, sending a positive signal. ASP declines, cut margins at the device makers constraining capital available, the negative signal. The results sent confusing signals and the business -- and business, as usual until this quarter -- until the end of this quarter.

Now, let me move to the Brooks specifics and how the market dynamics played out for us this past quarter. Again, when we provided guidance for the quarter, we were four weeks into the quarter and felt we had a good handle on demand, based on the signals we got from our customers. I will point out that for our larger customers, there's a very tight signaling, but for our smaller customers, there's a much greater lag in the demand signals. Our customers remain positive through most of the quarter, and, in fact, shipments only declined moderately, albeit with several shipments moved out later in the quarter.

The demand signals tightly related to bookings were constant for the first part of the quarter, and until really the last few weeks of the quarter. And then, rather than demand rates slowing, there was a precipitous adjustment by several of our larger customers. We believe these precipitous adjustments were driven by a need to slow the incoming pipeline and adjust their inventory levels to match their production demand for shipments. Simply stated, we believe that the quarter-to-quarter decline in bookings at Brooks overstates the actual decline in demand at device makers for equipment. If we level the bookings at Brooks for the past several quarters, excluding the June quarter, you will see we have been running at approximately $190 million run rate. When we compare that to the June quarter, we are down about 10% from this level, and a quarter of what we believe is an overcorrection. We have seen this many times in the past, as our customers continue to take delivery of orders placed, and overcorrect the bookings on a short-term basis to adjust their pipeline and correct their inbound inventory levels.

I will state clearly that the decline in bookings does not reflect any lost market share. We do not believe it reflects any lost market share and we continue to gain share in the quarter as the outsource trend continues. Stating the obvious, revenue follows bookings. The semiconductor capital equipment industry, based on several forecasters, is expected to grow 3 to 5% year-over-year. So bottom line is for the calendar year, the first half revenue for Brooks is up significantly over 2006. We expect the second half revenues to be at a lower run rate, resulting in a year-over-year growth, approximately 8 to 10%. This is very consistent with our model regarding outsourcing and market share gains in the tool automation business where we expect to grow on average 5% faster than the industry. Our vacuum products business grew very well in the quarter with bookings reflecting more directly -- reflecting directly from more changes in the business level of customers with a slight offset for blanket orders placed in the prior quarters. The service business was off slightly from forecast, driven by lower demand for repairs and spares, which is typical when fab utilization is low.

Now to reflect on margins. Gross margins were in line with our expectations, given the drop in revenue and mix shift to more CDA. That is customer designed automation. First unit volume build was curtailed during the quarter, resulting in lower absorption of manufacturing overhead, and second our CDA business continued to thrive as we gained share, resulting in a lower blended margin for the company. The ramp of new products, which is a good thing over the long term, had a lower margin due to volume. We believe this last issue will self-correct as the volumes ramp and the low-cost region providers kick in on these products. At the end of the quarter, actions were identified to reduce labor and overhead and the actions implemented early this quarter. Additional reductions are being considered. As I have stated several times, Brooks is an operating margin leverage business. This should be clear from the quarter results, even at the lower gross margins we achieved expected operating margins and delivered earnings in concert with revenues at the lower end of the guidance.

Finally I want to highlight positives in the quarter which are significant to the overall health of the business. Independent of the industry cycles, which we cannot control, what is important is to execute on what we can control. First, new products are gaining traction. Second, we implemented a very strategic move in China to accelerate our low-cost region sourcing. Third, customer performance metrics are the best they have ever been in the company. Fourth, new product opportunities for existing products are emerging. And fifth, tool availability service model is gaining traction along with the product offerings improving margin.

During the recent Semicon trade show in mid-July we introduced several new products. We displayed our new Marathon Quad that was introduced in Japan last year, along with our prototype preview of a new additional platform. The Marathon family is designed to provide process-specific wafer handling platforms optimized optimized by using best in class modules and designed for almost every process in the fab. This product line expansion increases the served available market for vacuum wafer transport platforms by over $200 million. Interest level from the largest semiconductor makers was evident at Semicon. Several product groups commented that the Brooks platforms clearly meet their needs and can shorten their time to market for a new equipment offering. One large customer will ship their new product on a Brooks platform in October. Another large customer, who classically bought Brooks modules is expected to order a full system this quarter as part of their new product development phase. To put this all in perspective, we had 17 design-in wins this past quarter, probably the largest design-in win in the history of the company and clearly the largest at the system level.

We introduced our new cryopump offering, the onboard ISXP, which has been optimized for next generation process and offers 40% improvement in the tool regeneration budget. The reduction in the number of regeneration cycles is a huge value to the device manufacturers and will certainly result in end user requests for this capability, creating a clear differentiator from any competitor. The XP is under evaluation at several key customers in North America, Europe and Japan. The XP is 100% compatible with our current on-board IS PVD solution, and is field-upgradeable for the installed base of more than 3,000 onboard IS PVD pumps. We achieved record revenues in Japan for the CTI cryopump products, as design-in wins within the implant and PVD segments continue to take hold.

Vacuum and thermal applications assessment is a strength of our vacuum products division. During the quarter, we began new application assessments for our polycold system and the etch process. Low temperature applications are emerging in nontraditional areas of semiconductor processing and the polycold solution offers strong capability to satisfy the demands. These applications are being investigated very aggressively by customers and could result in opportunities for significant market growth. Similarly, we have developed a new configuration of our core cryopump that again, could significantly increase our served available market for vacuum creation. These and other development projects underway are targeted after demands for future generations of wafer processing, including optimized cost of ownership for OEMs and end users.

Our customer designed automation business, which we call CDA had a strong quarter in Q3, both shipments, and continued momentum with design in wins with major OEMs. The transition of additional business that we won at a large OEM continued to ramp, and soon we'll be shipping close to 80% of this customer's front-end systems. Another existing CDA customer will expand their business with us, including the front ends of their new tools by the end of the calendar year. Although the current gross margin for the CDA business is in the 18 to 20% range, much of the new business are coming in in the higher range or near 25%. This is an operating margin leverage business.

Strategically, we are ramping manufacturing operations in Wuxi, China and an in place infrastructure and very talented team that will be key for us to continue to reduce our product costs and improved growth margins. Our objective is to assemble and test critical components and systems at this site, and also to source certain materials for all of our manufacturing sites from this and other low-cost regions to reduce our purchase cost of materials and subassemblies. Construction was completed there of new clean room space at the end of July to house final assembly for both CDA and Brooks product. A separate clean room assembly area is focused on the final build of many of the subsystems including load ports, robot drives and other key subassemblies. Coupled with our own factory to protect IP, specific know-how and the needs of our customers merge and transit requirements, we have local supply chain management capabilities and have entered into agreements with several local suppliers for machine parts, printed circuit boards and other commercial components.

As with our other operations, the goal is to implement a variable cost model for as much as possible of our product content. As a result of this investment, we expect to have significant impact on gross margins over the next year, beginning this quarter. As we have stated publicly, this should result in a 300 to 400 basis point improvement in margins when fully implemented. Our emergent transit capability reduces total cost for delivered capital equipment. Again, Brooks is adding value. In our service business, we closed two significant service contract agreements. What is significant that they were with Asian customers who are recognizing the value of tool availability. One of these is the second largest service agreement for the company.

This is also significant as it's on the heels of the largest contract closed by the company being achieved last quarter, demonstrating momentum in the service model. Because Brooks knows the products and has the parts, we were able to provide predictive analysis and rapid response and repair better than any third party or internal operation with higher reliability and greater certainty of product performance. While the battle is tough in Asia, we see this as validation of the value we can provide and expect others in the region will see these results and move our direction. Additionally, a key OEM partnership to provide joint services to the market place expanded further, demonstrating the ability of Brooks to bridge the gap between OEM and end user.

Changing direction for a moment, I'm sure many of you are following the status of the stock option issue which we've been dealing with for the past year. We were very pleased last Friday when the U.S. Attorney's office in Boston advised us that they have concluded their investigation of Brooks and have determined to take no action against the company. This is not to say all is done. The company still has open dialogue with the SEC, however, we will do all we can and cooperate to bring that to a satisfactory conclusion. Remember, as we concluded our investigation, Brooks never lost Sarbanes compliance.

In summary, the semiconductor industry is going through a period of correction that has created a slower capital spending environment. As a result, our level of business for the just concluded fiscal quarter and also for Q4 is lower than it has been for the past several quarters. By the end of the calendar year or early 2008, we believe capital spending will pick up again. There are data points that suggest that the memory segment is starting to stabilize, and as the foundries invest in 45-nanometer technology, fabs are expected to increase their orders to fill the need. The key will be fab utilization and the general economy as it impacts consumer spending. We feel strongly that the company is positioned well in the market with our new products, our new products ranging from vision load port module and razor atmospheric robots to the jet equipment front end, have already captured many design-in wins are now beginning to ship to customers. Our now Marathon 2 Vacuum Automation Systems are being shipped to four new customers that we won. Over eight additional opportunities are very promising.

Our on-board ISXP cryopumps are under evaluation at all major PVD equipment providers, and are well-positioned to satisfy demands of 65-nanometer and lower wafer processing. The expansion of our True Blue service offerings to include our automation products is taking hold and additional service contracts continue to be added. I believe that Brooks has tremendous opportunity to expand and grow in its served markets. Our long-term growth outlook is on track, driven by market share gains, increased OEM outsourcing and more system business from OEM customers. In addition, we are excited by our potential earnings leverage as we cut our new products into volume shipments and as we start to realize cost savings from our low-cost sourcing. We have a strong management team, a clear vision, and are focused on executing to our goals. We hope to keep building value for our shareholders, customers, and employees. Thank you for your time, and now we'll open for questions.

Thank you. (OPERATOR INSTRUCTIONS). And our first question comes from Robert Maire with Needham.

Yes. You described basically an inventory correction at your major customers. Was that all three of your top customers and in terms of your top ten customers is that basically all of them or some of them or is it just that it's a significant enough percentage of your top customers that they all did the inventory adjustment at the same time. And second question is could you give us a little further clarity as to where some of the weakness was, was it broadly across your the cryopump business as well as your automation business or any particular strength that was stronger or weaker segment of business.

Thank you, Robert. Let me comment on what I will call pipeline/inventory adjustment. I don't think I could tie it to any specific product segment or any specific customers. As a matter of fact, I wouldn't tie it to a specific customer. What I can tell you is that when our customers drop a percentage point, a typical adjustment for us is almost 2x adjustment. So I would say on average, we saw, if our customers were down a few percentage points, we saw them down -- we were down about double that in the lookings because that's just the way we are in the system.

The second question, this is Jim Gentilcore, on did we see any particular product line over another one. I would comment that it was pretty uniform across all of our product lines, indicating that it's -- it's a more general correction than one specific customer or one specific process application.

The only exception I would give that, Robert, is the CDA business continued to grow. So as a blended gross margin, or a blended mix, you saw higher percentage of the lower gross margin product.

Okay. So -- in other words, I mean, in summary, it was fairly broad across your customer base? It wasn't just larger customers, it was a fairly broadly based inventory correction?

Yes.

Okay. Thank you.

And moving on, we'll take our next question from James Covello from Goldman Sachs.

Thank you for taking the question. Ed, a quick one for you, what you described seems like the normal cyclical downturn, nothing more, nothing less. Could you give us a little bit of a sense of timing, you referenced the fact that there's some pipeline capacity to come on memory and then memory prices, especially EMR and destabilizing where if we increased the investment levels at all the prices would probably dip back down. So what is your best estimate on how long these things normally have taken and therefore how long they might take this time to clean up.

Jim, thanks. I think that's really a good question. I wish I had a great answer for you if I look at more of a macro picture of unit volumes versus ASP, I think my remarks were I stated I thought this was an ASP-driven downturn because there was not a lot of capital to spend by the memory guys. But as the big unit volume continues to grow, driven by PCs and the incremental memory on PCs, as well as other hand held devices and iPhones and on and on with all consumer devices, it kind of looks -- if we really believe that the unit volume is going to continue to grow and about a 14% to 16% annual rate, that the -- the increased install base and what's in the pipeline could probably be absorbed over two to three quarters. So I guess that's as close as I can come.

And then I guess memory is a little bit bigger component of it this time, but that's -- that's included in the two to three quarter kind of time horizon?

Yes. And I would say if we look out for capital spending, there's a fairly strong consensus when I talked to our customers that memory can make up about 50% or slightly greater total cap spending for the next couple of years.

Great. That's real helpful. Thank you, Ed.

And moving on, our next question will come from CJ Muse with Lehman Brothers.

Yes, good afternoon. A couple of quick questions here. I guess first off, with CDA business continuing to grow or I guess hold up better than the rest of the business, can you comment on whether that's your customers expanding into new products with CDA or is that one or two customers holding up better than the overall industry.

It's probably more CJ, the market share gains. We picked up some of the flex business away from them in the short term. I think it's more of a timing thing. You know if this sector or those customers do continue, that business will start to self-correct in line with the rest of either the upturn or the downturn in the industry. I think we are seeing an anomaly for a couple of quarters again, just because of the market share gain they pulled in as the flex business turned over to us.

Got you. And then in your prepared remarks you talked about some reductions to the cost structure. Can you provide a little more color on what you are doing there and what impact that will have on your break even level?

Yes, the break even I contend, even if you look at what our guidance, is I still contend that our guidance is about $135 million or maybe it's 138. The difference is we drop off. The guidance I just gave at the 160 level, if we drop into the 135 level or another 25 down, you would only see a gross margin impact in my estimate of another 8 to $10 million. The reason being, I'm assuming that the CDA would -- if we did fall down to a 135 number -- I'm not suggesting that's where we are going but on a break even level, the CDA piece would align with the market and the variable content there is about 70%.

So -- so I think it does fall back into that, where we have always suggested the break even of the company is. Again, we've got in this quarter, we've got it down in the range, you know, 20 to $30 million in revenue. And truthfully in that drop, our CDA business will be stronger in our September Q than it was in the third queue.

Got you. I guess really when you are -- in your press release you talked about reducing some fixed expenses. I guess we shouldn't expect break even going below 135?

For now, no. We have sized it at about 135. If we kick in the kind of strategy with sourcing, I think you will see the break even coming down. And I do expect to get impact in that in the December Q. But I want to stand pat on a 135 for the next couple of quarters. And then, again, as they start seeing traction, but we will -- I'm expecting to see seven digit type of savings in our December Q. With all the issues coming in China.

Excellent. And last quick question. Bob, for -- the cash flow that you have there, pretty sizable still. Any plans for another buyback?

No, not at this time. But, again, if you look at the -- I will just remind you that that balance sheet that you see is also -- you need to subtract $110 million that was dispersed in July. So we are still sitting on about $260 million in cash post the buyback. Not at this time. I think we'll wait and see in the next coming quarters.

Beautiful. Thank you.

And next we'll go to Peter Kim with Deutsche Bank.

Hi. Thanks for taking my question. Your comments regarding the -- your bookings relative to your customers pulling in some inventory to -- to reduce inventory, I should say. And that it was -- as a result, your bookings decline was kind of exaggerated. Are you suggesting that your customers' business level is at such a rate that you don't expect to see a large bookings decline in the next quarter?

Yes.

In the -- in the September Q?

Yes.

Our estimates are more flattish and from an order trend standpoint.

I think what see is that that kind of adjustment typically takes two to three months to work through the cycle and we started it at the end of the last quarter and it's probably going carry through to this quarter. But they will adjust at their -- it's all based on their shipments of units. It's not based on their revenues. So you have to be careful of that. So it's their build cycle and it's a direct tie -- I know the right word is inventory, but the reason I keep using pipeline is because we are so directly tied as a just-in-time supplier to most of our customers that when they have a build rate of 10, and they take that build rate to eight, they have to adjust the rate of 10 coming in. They will take it to six for a couple of weeks and then take it back up to get to eight. So that's what I'm talking about. It's more of a timing issue.

Orders through today, Peter, they are exactly in line as they were one quarter ago. So we are not seeing any more falloff, but we are seeing it at, again, the -- this recent June quarter levels through today.

And then if I could follow up and ask about your visibility in terms of how far -- how long of a visibility do you have relative to changes in the business level of your customers. Do you say you have one-quarter visibility or do we count that in weeks?

You know, it's interesting. That's a very interesting question because we typically do see a quarter or two out, but the reality is that our customers adjust that every week. So it's a matter of -- I would say the real honest visibility is like a week or two, but we do have visibility on orders from a trend perspective, but as we saw this past quarter, in June, we had some fairly abrupt adjustments on a weekly basis. As Bob has just stated, we expect to run at this current rate as they adjust and it shows quarter-to-quarter flat.

As we said before, Peter, of the good news about the way the purchasing cycles have worked is what used to be in the past were cancellations, we don't see that anymore. The problem is when you get in on a Monday, the phone doesn't ring as much as it did the previous week when the slowdown hits. So the visibility just gets dampened.

Thank you very much.

And our next question will come from Mark FitzGerald with Banc of America Securities.

Thank you. Are these OEMs still adjusting as we speak in the last couple of weeks or is this basically all that happened back in the June/July time frame?

During the quarter. I said, Mark, the order trends I see even through today are exactly the same pattern we saw through the quarter last quarter. We -- we book in the March quarter very consistently, the 213 quarter we booked 70, 70, and 70 effectively and this last quarter we booked in the 50ish and then a little bit more to the 50 and then got to a 60 number as we got to the June month. We're seeing the same pattern as I go in through finishing July and into my month of August.

Okay. And then did I miss the share count. Was it 6 million you bought back.

6060. So 6 million shares have been repurchased and those will come out for the quarter.

And was it any impact on the previous quarter?

No, because they settled July 5th.

Okay. So we will effectively have those outstanding for -- for the lower shares will be effective for some 80, 82 days 84 days whatever it is.

And the $300 to 400 basis point margin improvement that you are estimating here because of I guess in shift in manufacturing to China, does had come hell or high water? Even down here at the lower revenue rates, you'll still get that improvement?

That's pretty much price variance, yes.

Okay. Thank you.

Thank you. And our next question will come from Ben Pang from Caris & Company.

Thank you for taking my question. A couple of follow-ups. First on the CDA, I thought I was understanding what you guys were talking about normalizing but you are also saying that the CDA is going to be higher in the September quarter, right?

CDA?

Yes.

Our revenues will be slightly higher than in Q3. So why does the -- why doesn't the normalization already start to happen there? The normalization to the trend in the industry?

Right.

Because we took share in this last quarter with flex products. So prior to that we were providing one set of tools and flex products was providing another subset of tools. We have now converted over and that mix shift is coming in and so we will pick that up. When the cycle adjusts both sectors will decline. It's because of a share gain.

A follow-up on that is on the original customers that you had for the CDA, are you starting to see those particular design wins or whatever, migrate over to the Brooks standard products? Because that was the idea; is that right?

Yes. That is the right -- but I think it's -- it's a little early to see that emerge in new design-in wins. The answer is, yes, we are seeing new design-in wins but they are not ramping yet.

Okay. And last question on the 17 design wins, can you give a couple of pieces of extra information here in terms of, are those mostly among your larger -- your top ten or are those the smaller customers? And the second one is do you count the CDA as part of the 17?

The answer to the latter question is to. That 17 is in the automations platform business and it is fairly broad based and it does include large customers and I would say medium and smaller customers.

Is there any weighting or is it like your revenue mix, 50 to 60% top ten?

There were a couple of large customers, as I mentioned in my remarks. One of the large customer design-in wins will ship in October, as a new platform for that customer. So I think --

Thank you very much.

Okay?

Thank you.

(OPERATOR INSTRUCTIONS). Moving on, we will go to Jay Deahna with JPMorgan.

Thank you. Bob, where should gross margin go as we look into the September and December quarters? What should we be thinking about there? And what about OpEx in fiscal '08, what are you going to do with that?

In my guidance comments, Jay, I think I said it's a 160, 170 level. I would go to a 27 to 28% gross margin. So for the near term. If -- if orders -- our expectation is that orders will be very close to the revenue stream. So I don't -- I don't see December -- I would see December margins slightly picking up as we get a little a bit of that China kicking in and maybe we get 100 basis points in the December Q. But we should start seeing, on an apples-to-apples basis we should start seeing that traction by at least 100 basis points. We will be in the seven digit range. Operating expenses, we go to the new year. I would say we will be -- at the low end of this range, it will be in the 40, 40 per quarter so let's say 160 to 165 for the full fiscal year of '08. I don't see any dramatic changes in operating expense going through the year.

Okay. And let's say hypothetically, first half of calendar '08 is kind of flattish for revenue.

160, 170.

Yes.

Oh, I will take it. I'm actually looking at how to take even more down if this thing stays sustained in some of our very remote offices.

You are talking about OpEx, right?

Yes.

Where I was going with the question, I was wondering if revenues were flat in the first half of the calendar year next year, just hypothetically do you expect your gross margin to creep higher?

Yes, because the savings from Asia, from China specifically.

If the revenues go up, margins go up even more then?

Correct. Correct.

That's where I was going with that.

That's correct.

And then lastly, sort of a follow-up to Mark FitzGerald's question. You indicated several times that, you know, had you some pushouts or adjustments or whatever in the second half of June it sounds like.

That's right.

Would you say that -- I wasn't clear in your response. Would you say that your forecast looking out for the next quarter or two at this point has sort of stabilized or is it, net pushing or net pulling?

Let me see if I can characterize better. What we saw was a -- I would call it a precipitous move in the last -- last part of the last quarter specifically in June. And that trend has continued into the first part of this quarter. When I say that trend, that level has continued from some of those customers into this quarter, and what Bob and I are both saying is that the business level will recover to a higher level, such that the two quarters will be about the same. But we're going through about a 30 to 60 day pipeline adjustment to a different shipment level that's trying to match with the shipment level out of our customers. Does that make sense to you, Jay?

So basically, they took it down and then they kept it flat at that level since, it sounds like what it's saying.

For a short time and then they will take it back up again to match the actual shipment level. So it's a matching of the pipeline. So in other words, as I tried to use an example, if they had over 10, and their actual shipment level is eight, because the pipeline coming in would support a 10 shipment level, they take the bookings down to six for a short period of time, and then recover to eight. So that's the demonstration. That's what I'm trying to demonstrate is that the short-terms bookings change is not necessarily a sustained down. That's what I'm trying to get to.

Right. And what I'm concerned about or feeling better about or whatever, is that you have that adjustment.

Yep.

You expect it to sort of variance back to a normalized level.

That's right.

But in the meantime, they haven't actually taken another incremental step in taking you down to four in your scenario. So in other words it came down. You are dealing with that. You expect it to come back but you haven't had a second leg down since late June.

Oh, absolutely not. If anything, we have seen just the opposite. We started to see some of those who took earlier action come back.

Okay. Okay. So you feel like the worst of the adjustment is behind you or do you feel you are in a stable mode right now and we'll see what happens?

I think we are in a stable mode.

Last but not least what did your customers say to you was the reason they made the adjustment.

They didn't say anything. They didn't call us. As Bob said, there were no cancellations or no pushouts. It was just the order placements stopped and when we had these direct connects to their computers, the shipment dates for the next unit was pushed out three or four or six weeks. So it wasn't pushouts. It wasn't cancellations. It wasn't they didn't place the orders for what it been in the pipeline for six months before. They changed the forecast. Does that --

I think I just heard you say they pushed out the delivery date but there was no pushouts.

Well, I know. You're right. That's what I said. They didn't really push out. They kept taking the shipments from us but they didn't place orders. I'm looking at two pieces of paper here. One is what the customers' forecasted shipments of what they think they are going to take and the other is the actual placement of the order to reflect that. And what happened is the orders didn't come in to match what was on the computer as an expected order rate.

Okay. So they gave you a slot plan. You were expecting orders off the slot plan. You never got the orders and therefore you never shipped it, which means their slots must have pushed internally?

Must have. Thanks for the clarification.

And moving on, our next question will come from Satya Kumar with Credit Suisse.

Yes, thank you for taking my question. So hypothetically, let's say again if your customers were to see a oscillation in their bookings in December, when would you start seeing that and should we then have a higher data to your bookings in December then?

The typical thing we see Satya is when we go to -- when they go down five, we go down ten. When they go up five, we go up ten to fill the pipeline again. So the answer is if we see -- if they see December up, we will probably begin to see that in November.

Okay. And right now are you selling any equipment that goes into any of these flat panel systems that are used in solar installations?

We are not selling atmospheric -- excuse me. We are not selling automation systems. We are selling some -- some of the vacuum pump systems into the flat panel system area.

Okay. And I think earlier on you mentioned you are seeing some signs of stability in the market. And when you said that were you specifically thinking about -- what are your expectations for DRAM versus LAN? Are you seeing any stability on the DRAM front or maybe think about any improvement from memory?

I quite honestly don't see a breakdown that far. I see it as memory, flash and DRAM together. I just don't have the data.

Okay. Thank you.

And moving on, our next question will come from David Nuremberg with Nuremberg Investors.

Ed, we are 45 minutes into the call and no one has yet commented, unless the company has changed its expectations of the length of your service. This may well be your final earnings call, as the CEO of Brooks Automation. And if it that may be so, we just wanted to thank you for leading and presiding over a tremendous transformation of this company.

Thank you, David. Appreciate that very much.

And moving on with our next question, we do have a follow-up from Peter Kim with Deutsche.

Yes, thank you. With regards to your transition to Wuxi, did you set a timeline for when this transition will be completed?

It's going to be -- it's going to be an ongoing issue. It's already begun and there are certain products that will move now. There will be other products that will move over time. I don't believe there's a saturation point for our move. It's just going to be a gradual transition.

It will be over the next 12 to 18 months is where you will see most of the transition.

Okay. And in the beginning, you -- you are primarily starting out in your CDAs. Basically your front end interface.

No, initially it will be sourcing. Sourcing of products out of that facility. It will eventually be some CDA as we get into it. It will also be a significant portion of our existing load port business.

Okay. And lastly, you talked about approximately 100 basis point improvement in the December quarter as a result of this. What do you -- do you have a schedule for what kind of improvements you might expect to see over the next, you know, two or three quarters.

I have a schedule. I'm not going to share it with you.

Okay. I figured I would ask anyway. Thank you.

And the reason -- let me clarify that. The reason being is there's a lot -- there's a lot of estimated costs coming down, which some of it is solid. Some of it is still being worked out. I will continue to share that with you though as we get more ground moving forward. But we are at the early stages and I would rather underpromise and over deliver in that regard.

Okay. Thank you.

And our final question will come from Timothy Arcuri with Citigroup.

Hi. This is Srini calling for Timothy Arcuri. My first question is on your NOL, what is the value? And did you write it back in September.

We are working with the auditors right now. The value is about $150 million.

Okay.

And we will address that with the auditors in our September year-end results.

So you are saying you will write it back.

I'm saying we are reviewing it with the auditors to decide what we should do, is it required to bring it in or not in the September quarter.

Okay. What is the reason for the margin shortfall this quarter? You said it's related to mix, but could you give us more?

Really it's the drop in revenue. The revenue has come down to $190 million.

Right. Okay. And going forward, when you say that you are moving to China, aren't also Merchant Transit? Will those be additive for your margins are not.

Merchant Transit will not change margin. Moving to China it will be additive to the improvement to margin. That's what I discussed about getting to the 100 basis points in the December Q and as we have said publicly before, we do see a 300 to 400 basis point improvement in gross margins for the total corporation because of that move as we start to saturate the benefits there.

And once -- basically your tax rate would go back to 36%?

Yes, 36 to 37. If it's required to, to bring it back, in would you get a one-time P&L benefit of about $150 million.

Okay.

And then you would have an implied tax rate of about 36% to 37% on PBT earnings. I will caution you with your model, you will not pay that in cash taxes. So the cash taxes that were paid regardless of the rate will still only be in the 5 to $6 million per year.

Thanks a lot.

That's all the time we have for questions. I will turn it back to the presenters for any additional or closing remarks.

I would just like to thank everybody for joining us, and this does conclude our call today. Thank you.

That does conclude our conference. We'd like to thank you all for your participation.