Azenta Inc (AZTA) 2010 Q1 法說會逐字稿

Good day everyone, welcome to today's Brooks Automation earnings conference. Just as a reminder, today's call is being recorded. At this time, I would like to turn the conference over to your host for today, Mr. Martin Headley, Chief Financial Officer.

Please go ahead, sir.

Thank you very much, Sarah. Good morning everybody. I'd like to welcome each of you to the Brooks Automation fiscal 2010 first quarter results call. A press released was issued earlier this morning and is available on our website, www.brooks.com. You will also find posted there copies of the PowerPoint slides used during our call today.

I'd like to remind everybody that during the course of the call we will be be making forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. There are a number of factors that could cause actual financial results or other events to differ significantly from those identified in such forward-looking statements. I refer you to the section of our earnings release titled Safe Harbor statement, Safe Harbor slide on our website, and the Company's filings with the SEC. I'd also note we will make reference to a number of non-GAAP financial measures which are used in addition to and in conjunction with results presented in accordance with GAAP; they should not relied upon to the exclusion of GAAP measures. Management believes those financial measures provide an additional way of viewing aspects of our operations, but when viewed with our GAAP results and the reconciliations to GAAP measures, provide a more complete understanding of our business.

Robert Lepofsky, President and CEO of Brooks, will open the call, after which I will provide a more detailed overview of the first quarter financials, and then we will turn the call over after our prepared comments to take your questions. Bob?

Thank you, Martin.

Good day, ladies and gentlemen. We appreciate you taking the time to join our call today. Earlier this morning, we announced our results for our first fiscal quarter ended December 31. Quarterly revenue growth was up some 65% sequentially, ahead of our projected growth of 45%, substantially higher than the 45% sequential gain we recorded in the September quarter and strongly ahead of the sequential revenue growth you have seen from many of our customers and industry peers. Compared to last quarter when we had a $14 million loss, we moved to essentially break even operations this quarter and now project progressively stronger profitability in the quarters ahead.

At this level of revenue, you and we would have expected stronger sequential operating performance given our pace of drop through performance in recent quarters and target performance model. Two principle factors contributed to our lower performance, revenue mix and expedited transportation costs. The revenue mix relates to an unusually high proportion of extended factory revenues, which as you know, delivers significantly lower gross margins and profit drop through. Our target performance model assumes extended factory operations to represent about 20% to 22% of total revenues. Last quarter that number rose to about 29% of revenues.

Late in the quarter, an accelerated ramp schedule was placed on our extended factory operations in both the United States and China. Our people and our supply chain partners were challenged to rapidly accelerate planned output, including some new system platforms that were not expected to be at full production rates this early and further stressed our supply chain. The good news, our people and our partners came through and performed incredibly well, positioning our key OEM customers to deliver excellent performance in the closing weeks of last quarter. Unfortunately that performance came at a cost to us of roughly $1 million in special expediting and transportation costs. These circumstances remind me of the words of a former colleague who would periodically step back and question why is it bad to do good things.

Importantly, our core business components, systems and service, had strong sequential growth, performed well in absolute terms and operated within the bounds of our target model. With about $75 million of non-extended factory revenues in the quarter, we passed through the break even point, delivered positive EBITDA and generated cash. Equally or more importantly, during the quarter just ended we remained on track with our critical operational improvement, margin enhancement as well as product and market development initiatives that are key to our full year 2010 performance and which position us for 2011and 2012, by which time we continue the project having a broader product portfolio, wider market reach, and impressive financial performance.

To that end I want to quickly provide you with summary update on just two of those initiatives, our work in what we broadly refer to as the gas analysis market and our work in the high brightness LED field. In gas analysis, we've begun the first stage of a carefully sequenced stream of product introductions built around our unique and proprietary ion trap technology. The initial public disclosure of key elements of the technology presented at the American Vacuum Society conference in November resulted in the receipt of an innovation award from AVS, confirmation of the uniqueness and attractiveness of our solution set, and a high degree of interest from key players in targeted application areas. In April, a formal product release will take place at the Society of Vacuum Coders meeting with initial revenue generating products deliveries beginning shortly thereafter. We are currently expecting a growing revenue stream from this new line of measurement solutions for the second half of fiscal year 2010 and important contributions to both our top and bottom lines in 2011 and beyond.

Our initiatives in the high brightness LED field continue to progress and expand. As we have discussed before, automation is considered a key enabling technology in facilitating the growth of LED production equipment market and in particular, its successful expansion into the illumination sector. The breadth of our engagements with key participants in the field are increasing. Our people are working extremely hard and staying on target. We have dedicated project teams working with key OEM accounts, developing new and unique solutions that leverage both our component and automation systems expertise. Initial deliveries of next generation tool solutions are on track and will take place within the next 60 days.

Revenues from our newer engagements will be increasing in the latter part of this year. We see our work in the LED space as a critical element of our growth and market diversification strategy and expect to see important contributions to our top and bottom lines in 2011 and beyond, particularly as the demand for LED based illumination products continues to gain momentum. Finally, you might note in our press release, our reference to two IP-based transactions that closed shortly after the quarter ended; in one case we acquired IP that will add to the present deep and substantial IP portfolio in the tool automation field. In the other case, we sold IP that had been developed some years ago but is no longer being exploited by Brooks.

In short, we have a lot going on at Brooks, and while each of the moving parts is not exactly playing out as anticipated, the critical elements of our plan are in place and are on target. The first half of our fiscal 2010 continues to be dominated by the steep ramp in output to support the current needs of our semiconductor OEM accounts. We expect that the second half will see an increasing impact from our strategic initiatives, be that improved cost price structures of existing products, the growing impact of new products, and the increasing penetration in new market segments. Against that broad backdrop, I will pass the call back to Martin, who will provide additional color and details on the quarter's performance before we open the call to your questions.

Martin?

Thank you, very much, Bob.

During my prepared comments, I will make reference to slide numbers from the PowerPoint presentation, posted on our website to accompany these remarks. On slide number three, you can see the impact of the significant ramp in semiconductor capital activity, driving our revenues up $42.1 million, or 65.7%, on a sequential basis. This translated in to a $14.4 million improvement in gross profits, a 34.2% incremental rate. This was impacted significantly by the much faster growth of our lower margin extended factory business and about $1 million of expediting costs incurred in support of this aggressive ramp of business levels. R&D spending increased very modestly returning to levels of a couple of quarters ago. The September quarter costs have reduced activity and cost levels.

SG&A expenses were essentially flat. Sequentially, we narrowed the operating loss attributable to Brooks before special charges, $0.3 million, and we would have shone profitability for the quarter as a whole but for stock compensation expense increases. The revenue recovery was mostly driven by increased sales to our larger semiconductor OEM's, as a result of which semiconductor revenues rose further to 85% of sales in the December quarter, as shown by the chart on slide four. Sales rose in most of our served market segments, just not as aggressively as the semiconductor business. Our top four semiconductor OEM customers comprised about half of our revenues in the quarter.

Slide number five shows how the revenues and operating profits, before special charges, bridge from our fourth quarter of fiscal 2009 to this first quarter of fiscal 2010. In particular, it demonstrates that although the overall drop through was lower than projected, each of the businesses was operating to the model we previously explained. Excluding expediting costs to support the ramp, our core critical solutions and GCO businesses provided incremental profits of 49% on each additional dollar of sales over the September quarter. The system solution business only provided a 23% incremental contribution, excluding ramp support costs as a result of the heavy weighting of growth from the extended factory. Expediting costs were mostly exceptional freight for both inbound and outbound transactions to assure appropriate customer service levels in this rapidly accelerating environment that many of our supply chain partners find challenging. Few of these costs will be considered permanent, although some will extend into the early weeks of the March quarter.

Slide number six shows the progression of adjusted EBITDA to positive territory, first from restructuring actions taken in the second quarter of fiscal 2009 and then from the strong subsequent revenue growth. We would also note the $26 million improvement in adjusted EBITDA from a year ago leveraging off some $33 million in revenue growth, the majority of which is from our lower margin extended factory business. From a Reg G perspective, please note that the adjusted EBITDA reconciliations are provided as a supplement to each of our quarterly earnings releases.

Turning to slide seven, both special charges and taxation had negative impact on the GAAP net income in the quarter. Special charges comprised restructuring expenses of $1.5 million and included $1.2 million related to the cumulative impact of prior periods in accuracy in present value discounting of multi-year facility restructuring liabilities. We also incurred a final $0.2 million loss on liquidating a residual minority investment position. Interest income moderated slightly as the short-term investment yield environment gets tougher and currency fluctuation impacted in other income. We recognized a $600,000 income tax provision with higher foreign taxes that are not sheltered by loss carry forwards. Our Japanese joint ventures narrowed their loss profiles for the quarter, but did not yet get to break even. Overall, the loss attributable to Brooks improved from $14.5 million to $2.8 million. That loss was $0.04 per share on a fully diluted basis; excluding special charges, the loss from continuing operations was $0.02 per share, and was a profit of $0.01, excluding stock compensation expense.

We generated cash of $800,000 in the quarter as shown in slide number eight. Restructuring cash outflows were $1.5 million; more importantly, we only utilized $3 million of additional net working capital in supporting the ramp or $0.07 per additional $1.00 of sales on a incremental basis. As a result, we were able to generate $1.4 million in cash from operations. Capital expenditures for a second successive quarter were $0.5 million. Modestly higher capital spending is projected for the remaining quarters of the fiscal year.

Looking at our critical balance sheets accounts as set out on slide number nine, you will notice the growth in cash and marketable securities from $110.5 million to $111.4 million. This includes those securities classified as long-term on our balance sheet which are nevertheless freely marketable and can be considered readily liquid. Effective working capital management is a critical element of our focus to produce, enhanced return on cash investment. Overall, our working capital velocity improved with working capital reduced to 16% of annualized quarter sales. In this area, receivables performance improved again with a day sales outstanding reduction of 9 days, which limited the impact on receivables from increased revenues to $14.8 million. Inventories increased by $5.1 million, with some slight end balances as some vendors excelled in supporting the ramp and delivered on time while others struggled and caused the holding of inventory. Overall, inventory turns are headed in the right direction improving from 2.5 to 3.6 turns. Days payable outstanding moved out 4 days, with payables increased by $19.8 million. Accrued restructuring cost decreased by $700,000, with the accrual of adjustment previously referred to, partially offsetting the continuing cash payments of the accrued liabilities.

In the next three slides, I will briefly cover our sequential segment performance. On slide ten, we summarize the sequential results of our critical solutions segment. The top line increased sequentially by 69%, with the strongest growth once again in our vacuum and atmospheric robot product lines that have the greatest focus in semiconductor markets. Gross profits improved by $8.9 million to a margin percentage of 37%. Operating expenses increased very slightly from R&D initiatives and seasonally adjusted spending. This business returned to profitability in the quarter with $8.2 million of additional profits.

On slide number 11 we review the systems solutions segment. Revenues grew by 90%, heavily driven by sales to larger semiconductor OEM's from our extended factory business. With that lower margin mix gross margins improved more modestly by $4.2 million. Operating expenses were essentially flat and thus the segment too reported fully absorbed profitability for the quarter.

The global customer operations results set out on slide 12, show 15% growth in the pure service business, to $15.9 million. Gross profits improved by $1.3 million, and operating expenses were flat. This segment was profitable at the contributed profit level before allocation of corporate costs.

After focus on the past quarter, I will briefly address the future. Our thoughts are best summarized on slide 13. Bookings increased by 68% in the December quarter, resulting in a $103 million order backlog of the end of the calendar year. This growth in backlog, together with imports from our customers, lead us to project revenue increases of at least 35% for the March quarter. This revenue mix will have an even more significant extended factory mix profile, but again skews growth towards our systems solutions segment. Despite that, we see the results in operating return on sales to be within our target model range of 6.5% to 7%. Additional factors that will impact our reported earnings in the March quarter are again arising from the sale two days ago of the non-core intellectual property Bob referred to previously. This gain is estimated at approximately $7.8 million. Finally, with an expectation of sustained profitability, we shall be recognizing income taxes at an affective rate of around 7% going forward.

With that, I will open the call to questions. Bob will close the call after we have addressed your questions. Thank you, Sarah.

Thank you. (Operator Instructions). We'll go first to Patrick Ho, Stifel Nicolaus.

Thanks a lot. A couple of questions. First, in terms of the sustainability of the semiconductor OEM business on a going forward basis. I know visibility is tough for you guys, but Bob, can you comment what you think might be progress, how the year might progress in terms of the capital equipment market?

Thank you, Patrick. I think that I'd frame my response to you in the conference calls of some of our largest OEM's over the course of the last week. Clearly, the March quarter will again be very strong. It is strong through January. It continues strong as a solid book of business, the book of business in to the June ending quarter is filling up very, very nicely.

And when we all look beyond the June ending quarter, it is with a level of lack of visibility, and certainly, there is as you well know this raging set of views out there one side believing that we are in a peaking and the other side believing that we are still expanding. And as one of our largest customers said a week ago, we can only tell you what our customers tell us. We can only anticipate, we can't guarantee.

We fall in the camp of those major OEM's that believe this is not a peak, but certainly the magnitude of the sequential growth rates can't continue. If you just look at Brooks, 45% followed by 60% plus followed again by another strong -- we just can't keep stocking 40% and 50% sequential growth, but we do believe that at worst a flattening and at best, solid growth in the traditional markets.

That's helpful. Going to the LED business and the opportunity that you see on a going forward basis, I think you've mentioned in the past that you expect to see automation, critical components, and your extended factory businesses, is there anyone of those three segments that will first see that type of ramp? Is it automation that's getting the adoption right away and then critical components come on, are you seeing all three hitting a at the same time?

At the present time, we supply numerous of our critical component portfolio, numerous elements of our critical component portfolio to a range of the players. As we have been discussing, given the fact that most of the tool sets that are in production today have very little automation content, one; and number two, there is broad agreement across the industry that automation is a key enabling technology, that the next generation of tools, scheduled to begin shipments in the second half of this year, that automation solutions will be a key aspect of those tools.

We are quite pleased and excited that we have been able to leverage our component expertise with our systems expertise to be the solution of choice for multiple players. So as a result, the engagements are increasing and as we move forward, we will have more automation system content going to the targeted players, and as I said in my prepared remarks, the teams are dedicated teams, focused on individual customers and that means dedicated engineering, production, customer interaction teams; and we actually begin some initial deliveries as quickly as 60 days from now. But the real ramp to those start to impact us late in 2010 and are absolutely key to our anticipated strong growth in '11 and '12.

Great. Final question from my end. As you just mentioned, on the semiconductor side of things, business continues to be really healthy and continues to pick up. How are you -- what gives us assurances that you won't be having these expedited costs on a going forward basis, particularly if demand trans continues to be strong and your customers are basically asking you to accelerate their deliveries?

I think in the early phase of the ramp, which again, we were in a ramp, and that ramp took a significant -- had a significant inflection point in the first couple weeks of December. And, again, I refer you back to the comments of some of our customers. In the month of December, things were really overheated and the focus of our people were "get the product out the door to meet the set of customer requirements" as they were attempting to meet their customer requirements. In the course of that process, our people pulled out all stops to get there.

Certainly did not in the last two weeks of the quarter say to customers, "well, it's ready to ship, but we need a new purchase order to cover the expensive air freight charges." Equipment was placed in airplanes, accelerated deliveries and after the quarter ended things were a.) starting to come into a little more equilibrium as we got into January, gave us a chance to pause -- and also gave us the chance to engage with some of those customers about recouping some of those excess charges.

So, I think our people did the right thing for the customer, painful for us as I said in the short term, but certainly demonstrated who we are and certainly positioned us well with our customer base going forward; and we've worked out the kink. That said, we will still have the heavier than normal impact of extended factory revenues against total revenues in the current quarter.

Great. Thanks a lot, guys.

Up next from Deutsche Bank, we'll hear from Hari Chandra.

Thank you. My question is on the gross margins. Given that the (inaudible) is in the $19 million range, is there a lag in gross margin above and beyond what you think in terms of the expeditement costs? And also the product mix looks like it seems to be dropping through a little slower than anticipated?

It's solely the impact of mix, Hari. As we made comment on the call, we're seeing the drop-through from core critical solutions and GCO businesses at 49% and that is consistent with our model and the break even. If the mix were at the 20% to 22% Bob referred to for the extended factory, it's clearly an awful lot higher, as well as the exceptional cost that we referred to and I've just talked about from an expediting viewpoint.

From our perspective, those are the only things that are lagging our gross margin performance improving to the levels that we wish to see.

And a point of clarification. In terms of the extended factory gross margins, where are they now and where do you see they can potentially go?

Well, if you talk about the impact -- clearly, you see our systems solutions gross margins are currently at about 16%. We see that those can drive over 20% nicely and as a blended whole, pretty rapidly after we get a little bit more balance. There will be progression as we move forward and we'll drop through at the rates we've previously indicated.

And in terms of the newer opportunities, that you've been talking about for the past couple of quarters at least, LED, gas analysis, and also in the previous quarters about solar, which may not have come through as expected but -- how do feel all these three in the quarters ahead, what is the type of opportunity that is there for you to capture?

I think that we have quantified the LED opportunity specifically in a number of presentations that suggests that it will rapidly grow and in 2011 is an opportunity in the $20 million, $30 million, $40 million range and growing significantly from there. The analytical instrument business, again this year, in 2010, the revenues are expected to be single digit millions for the full year and moving very strongly into double digit millions next year.

One final question on the -- you talk about customers expecting strong demand over the next several quarters, should this not translate into orders and visibility in to the second half of this year for you?

I think the visibility continues, lead time continue to be relatively quick. So we are receiving limited visibility outbound in terms of length of time, people are still assuming that orders can be placed on fairly narrow lead times and there is continuing adjustments amongst our OEM's week to week on the adjusting of their schedules; so we continue to see those fine tunings and tweaking that we continue to monitor, but still don't give us an extended visibility with any longer time frame than we've had in the past. Bob?

I think that it is really a situation that as long as there is the high level of uncertainty in the broader economic picture on a global basis, there will be a reticence for semiconductor device manufacturers to aggressively expand to the extent that they gain confidence and therefore have a more solid view about their growth prospects, you will start to see in fact a growing book of business longer lead times, and higher certainty at the equipment level.

But in this period that we are currently in, in 2010, with the high level of uncertainty in the global economy, we will, I believe, continue to be subjected to low visibility and high expectation for rapid response to the demands of the chip makers.

Thank you.

Moving on to Barclays Capital, Christopher Muse. Please standby. While we work on the issue we will hear from Benedict Pang of Caris & Company.

Thank you for taking my questions. First on the extended factory revenues, you mentioned that the mix was higher than you expect. How much visibility do you have on a quarter to quarter basis in terms of that visibility?

Usually, we have reasonably good visibility. Again, I think that we were directly surprised on the upside, just as some of our customers have commented in their conference calls about their surprise in the early weeks of December on the sharp upturn.

We were all in the midst of a ramp, that ramp was going pretty well and then in early December, many of us in the chain and some of our largest customers particularly, and the largest customer in our extended factory, saw a sharp upturn. And we all collectively responded accordingly.

So in terms of -- if I look beyond the March quarter, what's your expectation now for that revenue stream?

I would hope that, that revenue stream would start to come more in line with our model and represent in the 20% to 22% of revenues going forward. The other piece is even that business will later in '11, later in '10 and into '11, gain some market diversity, different profile of customer and profit, and I think lit be an improving situation. But as we get further into this year, past the first quarter, we will come back in closer to modeled relationship for our extended factory.

Then on your new product stream, the three new products that you are talking about, how do we look at the margins for those products at the end of the year in terms of the mix? If they get to 5% of revenue in a quarter, does it dilute the margin at that point?

No. In both cases, these are offerings and solutions that have margin profiles above our current core business margin profiles. And that's again why we think that we will continue to be on an improving track regardless of what happens in the semi business.

My final question, in your OEM business, your business to the primary equipment makers, how do you think that they will look at the inventory level for Brooks products Are they going to try to build inventory given that everybody was rushing at the end of the quarter.

No way. And I guess that's just another piece of this puzzle. Again in our on going normal relationship, we've proved once again that there isn't a need for a big inventory build, which certainly kills everybody on the turn down.

So I think that there is real mind set relative to dealing with suppliers like Brooks that can can turn quickly, respond, prevents that number one. It also prevents openings for customers to look at "well supplier A can't meet my needs, I think I better go out and get a second or a third supplier." So there are also issues here of protecting position. I think those that don't meet the needs, and we see it in our supply chain, that's where you start to protect yourself a little bit on the upside and make sure that it doesn't happen in the future.

Given that scenario then, do you build in more of the expedition costs, expediting costs? Even if the revenue mix is normal?

No, we don't. That's why we think that this is an unusual period. A lot of pieces came together. We were in the midst, some of the work that was going on in the extended factory were some new platforms for customers that their original plans were those new platforms would move on a more rational basis through the first and second quarter.

But again, as their business broke open, we accelerated that the implication there were some of our supply based transitions; domestic and low cost regions were in a state of flux. So we had no excuses, but we had somewhat of a perfect storm in that segment of our business, and coming, again, very late in the quarter.

Thank you very much.

We will go again to Barclays Capital's Christopher Muse.

Hi, this is Srini calling for Christopher Muse. I just wanted to understand how you're going about target modeling in the next two to three quarters? If you could enlighten me on what the target model metrics are and going forward and how you would try to meet them, that would be very much appreciated.

Well, one of the key elements is that there are the elements of the new business that Bob's referred to starting to come in to the portfolio. Actions that we referred to in terms of costs and profit enhancement actions on some of our existing pieces of business that enhance and move us along the path that we were moving forward on and projecting forward.

As we build that in, and with the extended factory not growing and being the preponderance it has been, giving a better balance to the drop through, and therefore the margin position on our business, that drives us towards that model that we were previously laying out where we are now at 6.5% to 7% rate of return on our business projected for a second quarter. And that builds forward into improved metrics with the drop through rate returning back to the 40% rate, when we have this mix issue more in balance.

Let me add that this the issue of the model and the mix of businesses, we've tended to layout to try to get people to well understand that we have these two fundamentally different pieces of the pie, the critical component systems and services business, normally 35% to 45%, gross margins. And the extended factory which normally has 15% to 20% gross margins. And the extended gross margins do not include the Brooks component content.

Against that model, we've also said that as we put together our aggregate business model, we expect that the lower end the extended factory will be in the 20% to 22% of revenues. What happened to us last quarter was the extended factory was a.) at almost 30% of revenues, 28% to 29% of total revenues and had lower margins even within that segment, because of the extra costs. So rather than mid to higher double digit numbers, we were below the double digit numbers. So we had both margin pressure in the extended factory, and the size of that business on the total.

As we move forward, in the second quarter, we will see improved performance in the extended factory, in terms of its costs and margins. But it will still be above model in relative terms, above the 20% to 22% of total expected revenues. As we progress later in the year, the business mix, we anticipate coming step by step closer to the modeled performance. So I think that we are in a impact of December, January, February, and then beginning a balancing and as we get into the latter part of the year, we will come back to our very strong model performance later in 2010, in to '11.

Great. If I ask you about implied EPS for the next quarter, what would that be?

We really aren't giving guidance to that. We kind of -- we've given you -- the pieces are 6.5% to 7% operating margins on business that would be up at least 35% from where we are now; in addition to that we have some small level of restructuring costs, the $7.8 million gain on the sale of the intellectual property, taxes that are about 7% affective rate. I think people could view our a joint ventures as neutral to our earnings in the quarter. So when you look at that, that's substantially, that's a earnings performance that is substantially higher than anybody's model of, nicely higher than anybody's models that they currently have published at the moment.

Thank you. The one other question is on the LED portion of your business. What kind of revenue opportunities are you looking for a second half of 2010 and 2011?

We are continuing to see how that one develops. The revenues are probably in the -- in the high single low double digit levels and for the fiscal year, with the build really probably becoming more impactful to us in what's the calendar year second half, rather than the fiscal year second half.

So to expand a bit on there, we mentioned that some of the initial deliveries of our newer tool solutions, our broader tool solutions, come out of our factory in the first week of April. Those will move in to our customers' tool sets, ultimately to their customers. So the question will then become pace of adoption and transition, and we are just being cautious given the end of our fiscal year in September, we think that momentum will grow and we know we have requirements that extend into the latter part of the fourth fiscal quarter in to the fourth calendar quarter, of 2010 and the important acceleration, I think, goes from there.

Okay. My last question is basically on the June quarter. Do you think that the extended factory level of revenues will be more closer to your model of 20% to 22% or will it still be higher, like we saw in the current quarter.

I think it will be higher than the model, but it will be moderating from where it's been in the last two quarters.

Okay. Thank you very much.

(Operator Instructions). From Westcliff Capital Management, we'll go to Shawn Boyd.

Thanks for taking the question. I just want to clarify a couple of very key points here. First off on your SG&A, if I understand this correctly, you've got an extra $1 million in that December quarter number that we are looking at.

No -- that's in the -- it's in the gross margin, those are costs that we incurred and were recognized as parts of cost of goods sold.

Okay, very helpful. Second point, on the at least 35% growth, the previous caller alluded to this earlier, $143 million in revenues and 6.5% to 7% margins gets you to$ 9.5, $9.6 million in operating income, that I'm assuming is pre- the $7.8 million in gains we might see.

Correct.

That piece or that quarter is still burdened by this heavier mix in extended factory.

Yes.

My question to you is, by how much, whether you want to talk about gross margin or costs or margin, anything you can give us there to tell us how much that is still burdening that quarter would be helpful.

I think the burdening is in the multiple millions of dollars range. I mean, if you --

Again, the extended factory in the quarter will continue to be contributing to the bottom line.

Right.

It will be contributing at a lower pace than the rest of the business and, again, in the ideal world or in the normalized world, the extended factory is, as we said earlier, in the 20% to 22% range, in the near term extended factory is in the 27% to 30% range. And that will continue in the March quarter and then back off a little bit in the June quarter.

Okay. That's helpful. Now, to those of us who might be a little newer to the stock, what is about extended factory that makes the inherent gross margins here so much lower than critical component systems.

Very simple; the extended factory, our name for it, that is fundamentally a specialized contract manufacturing business for a group of semiconductor OEM's. The business model there in the contract manufacturing business is obviously quite different than in our proprietary products business.

When we make reference to the extended factory, we strip out the products that are used in that factory that are proprietary products. So it's a, if you will, a pure specialized contract manufacturing business. When you look at that business, it does quite nicely compared to people who are typically in the contract manufacturing business. We talk about, as we said, modeled margins in the 15% plus at the gross margin line, little SG&A costs, very high return on invested capital.

Got it.

So as a piece of the puzzle and strategically, this has been an important part of Brooks in the semiconductor space, in terms of our positioning with OEM's in the market. It is run as a separate autonomous business, so we can see it, we report it within our broader systems group because strategically moving forward, we are using that business as an extension of our growth opportunities.

Got it.

Fundamentally we come back, and this has been part of some of our recent investor presentations. You see some slides that we have posted as a result of those presentations that says when you look at Brooks it contains two pieces, proprietary business and the contract manufacturing business. And usually they work pretty well together this period that we are in with the extreme ramp as put more emphasis on the contract manufacturing; and it is added revenues, it is contributing to the bottom line, it just doesn't contribute at the same rate.

Understood. So last point on this you alluded to some new customer relationships also helping the margin of that business in the back half of the year. What does that do for us versus this 15% to 20% gross margin that we were thinking about on extended factory?

Yes, we would say that the new customer activities and the new platforms will move to that 15% to 20% range. The key is that right now in the core semiconductor space, we operate normally we operate in the 10% to 12% range and in the quarter just ended it even got stressed a little more.

Got it, 15% to 20 is where we are going.

Is where we are going.

Versus the sub 10% that we just had to nail our December quarter?

Right.

I'm almost through here; I appreciate you working through this here with me. On the margins, let's get out of December and March quarters for a second and reminds us again, what are your target gross margins and operating margins on a blended basis?

With subject to mix, we continue to drive a balanced growth of the business that moves us in to double digit operating margins. The blended mix at the gross margin level will tend to all in the -- in the 30s. With this mix of business it's very difficult for the total Company to move in to the 40s.

Got it. Okay. And to wrap it up for me, I want to go back to the very beginning of the Q&A where we talked about demand, we talked about outlook, we understand that it is very dicey out there in terms of visibility, yet we have had a massive inflection in the December quarter that caused some of these issues.

What I heard was from this $143 million revenue level, which is a minimum in the March quarter, what we see now tells us that at worst it's a flattening, meaning sequentially flat from that, at best we have solid growth beyond that, is that correct?

I think that's correct. And I think, here at Brooks, we also feel that some of our adjacent market opportunities that gain some momentum in the second half gives us a buffer if the flattening in semiconductor starts to be turning down in the semiconductor; so the adjacencies are helping us and giving us confidence that full fiscal year 2010, and certainly full calendar year 2010, will deliver really excellent performance all in.

Got it. Listen, thank you very much for the clarification and congrats on handling the step-up in demand.

Okay. Thank you for your questions. They help everybody understand the issues and our ability to amplify on them.

We will go to Benedict Pang of Caris & Company.

Two clarifications. One on your revenue growth, 35%, that includes the one time IP gains?

No, that does not include -- that will not be recorded as a revenue item.

Okay, on the extended factory, correct me if I'm wrong here. The old strategy was you had contract manufacturing for the products, but split them over to the Brooks core products, right? Is that still the way that business is going to work in the long-term?

No. The old strategy, as you may recall, was to take customer designed automation solutions and over time convert those customer designs to Brooks designs. The old, what was referred to as, CDA to BDA.

What has happened over the years that conversion never took place and the principle output of our extended factory today continues to be customer designed automation. However, as we are entering new market areas, we actually are starting with Brooks designed automation, which would be produced in the extended factory. That will be margin enhancing as well as giving us greater control over all aspects of the design and supply chain that supports that design.

So that business is going through its own transition as we look forward in latter 2010 and '11, but today it is, if you will, your reference to the old business -- customer designed automation produced in our factory as an extension of our customers' factories in a contract manufacturing model.

Thank you.

Thank you.

Thank you, Ben.

It appears we have no further questions at this time. I would like to turn the conference back over to our speakers for closing remarks.

Thank you, operator. That concludes our call today. We thank you for your time and participation. We look forward to sharing our progress with you over the months ahead. Have a good day.

That does conclude today's conference and we do thank you all for joining us.