Azenta Inc (AZTA) 2010 Q2 法說會逐字稿

Good afternoon. Welcome to the Brooks Automation financial results conference call. Please be aware that today's conference is being recorded. At this time, I would like to turn the call over to your speaker today, Mr. Martin Headley, Chief Financial Officer. Please go ahead, sir.

Thank you very much, Tamika And good afternoon, everybody, on this dynamic day in the market. I would like to welcome each of you to the Brooks Automation, Inc. fiscal 2010 second quarter financial results call. Our press release was issued at about 4:00 PM Eastern time this afternoon and is available on our website, www.Brooks.com. You will also find posted there copies of the Power Point slides used during our call today.

I would like to remind everybody that during the course of the call, we'll be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. There are a number of factors that 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, the Safe Harbor slide on our website and to the Company's various filings with the SEC. I would also note that we 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 US GAAP. And should not be replied upon to the exclusion of those GAAP measures. Management believes those financial measures provide an additional way of viewing aspects of our operations, but when viewed without US GAAP results and the reconciliations to those GAAP measures provide a more complete understanding of our business.

Joining me on our call today are my fellow members of the office of the Chief Executive Officer, Bob Lepofsky, Chief Executive Officer of Brooks, and Steve Schwartz, President of Brooks. Bob will open the call, after which I will provide a more detailed overview of the second quarter financials and a summary of our outlook for the June quarter, before turning the call back to Bob for some concluding comments prior to taking your questions. Bob?

Thank you, Martin. Good day, ladies and gentlemen. We do appreciate you taking the time to join our call today.

Before we begin our prepared remarks about the quarter and our outlook, I want to take a moment to introduce and welcome Steve Schwartz. Steve has joined Brooks as President and a member of the newly formed Office of the Chief Executive. In his first four weeks working with us, he has been fully immersed with customers and employees, including site visits across the United States, in Singapore and in Korea. He is currently focusing his efforts on a critical review of our overall business strategy and is deeply engaged with a number of internal teams and the full Brooks Board. We are all looking forward to Steve to increase the pace of our growth strategies, as we move forward. And Steve, we're all glad that you're here.

Now, turning to our results, in the midst of the chaos in the markets earlier this afternoon, we announced results for our second fiscal quarter, which ended on March 31. Revenue growth was up 40% sequentially, and as forecasted, we rebounded to strong profitability in the quarter, with operating profit before nonrecurring charges at the high end of our guidance of 7%.

Before some positive nonrecurring items that actually added $0.17 a share, our diluted earnings per share were $0.16 in the quarter. Our cash position grew again in the quarter, and our working capital was effectively managed, coming in at just a bit over 13% of annualized quarterly sales.

Before Martin goes deeper into the numbers, let me take this opportunity to thank our employees and business partners throughout the world, who have worked tirelessly to first manage the steepest downturn in our history and then to manage our steepest ramp, as business recovered. To put the ramp into perspective, shipments to our top three OEM accounts increased 11-fold over the course of the past year.

Business with some of our next year accounts have grown 15 to 20 fold over the same period. Our customers and our shareholders are the principal beneficiaries of the efforts of our dedicated people who have balanced the short-term challenges while protecting our longer-term opportunities during one of the toughest periods in our history. Simply said, we could not have supported our customers' requirements without the collaborative efforts of our entire team, our permanent employees, contractors, and suppliers. Turning to the business units, our critical solutions group, which includes all of the Brooks component product lines, had an excellent quarter.

In addition to meeting customer shipment needs, they continue to record key design in wins across all product lines. Of particular note in our robotics sector is the progress we have made in expanding the scope of our collaboration with Yaskawa Electric.

On our path to global market leadership and semiconductor and semiconductor-related robotics, we are now well positioned to offer our customers both here in the United States and throughout most of the world a total solution that utilizes the best of Brooks leveraged by the extensive capabilities of Yaskawa as we work in a more coordinated mode in development, sales, and support of advanced robotics solutions. New product initiatives in our pumping systems with an emphasis on environmental impact and energy savings continued in the quarter, at both an increased pace and a high level of customer engagement.

Our Granville-Phillips group has now formally rolled out their first gas analysis product under the new Simplicity Solutions brand and has received an excellent customer response. This first production which represents a totally new approach to vaccume quality measurement is just the first in a series of planned introductions in our growing instrumentation segment.

Each Simplicity Solutions product offering will be important, highly differentiated, targeted, and expected to expand the breadth of applications for our technology and broaden our market reach from R&D analysis, to process monitoring and beyond.

Within our systems solution segment, our extended factory as anticipated had another quarter of very strong sales unlike the December ending quarter, however, they delivered double-digit gross margin within model expectations and triple-digit returns on invested capital. Customers large and small have gone out of their way to thank us for facilitating their own ability to exceed expectations for the March quarter as a result of the outstanding performance of this group.

Again, in addition to keeping up with the ramp, our proprietary systems group, which designs and delivers unique subsystem level automation solutions took a number of important steps to ensure their long term future in the rapidly growing LED arena. We have now successfully passed critical milestones set late last year that will accelerate our revenue stream for this sector each quarter moving forward. Innovative solutions from this part of Brooks are an important element of the road map to lower overall device production costs for critical MOCVD process tools.

Automation is a key enabling technology needed to meet the challenging manufacturing cost targets that will determine the acceptance of LED technology in illumination applications. The Brooks lifecycle solution leverages our unique engineering, low volume, and high volume manufacturing capabilities, allowing the MOCVD tool maker to concentrate more resources on market and process development initiatives, trusting the challenges associated with the automation subsystem to Brooks.

And beyond LED production tools, we're turning an increasing amount of our attention to the emerging requirements for future OLED device manufacturing, which are presenting Brooks with new opportunities in automation, vacuum pumping, and process monitoring and control.

Finally, our global operations group continues its core work of supporting a large installed base of tools, many through ongoing contractual service agreements. The pace of contract renewals improved in the quarter and newly signed agreements are offsetting the conclusion of some older agreements that supported legacy products no longer part of our core business.

In addition, business development activities of the group remained focused on expanding our relationships with major OEM accounts, becoming their exclusive pump and robot support resource. During the quarter, we saw real progress in implementing plans to ensure we achieve the expected benefits of these newer engagements. And now against that backdrop, I'll turn the call back to Martin and then return for some final comments before opening the call to your questions. Martin?

Thank you very much, Bob. During my prepared comments, slide references relate to the Power Point presentation posted on our website to accompany these remarks. As Bob previously mentioned, Brooks reported GAAP net income attributable to Brooks of $12 million, or $0.33 per diluted share. The quarter benefited from a couple of sizable nonrecurring items. We had an after-tax gain on the sale of intellectual property rights of $7.5 million after-tax, and we recognized a $3.0 million tax credit from the application of favorable tax loss carry-back provisions introduced by the Workers, Homeownership and Business Assistance Act of 2009, impacting in the opposite direction we had special charges of $0.5 million in restructuring costs related to past restructuring plans. As a consequence, our adjusted net income on a recurring basis was $10.1 million, for $0.16 per diluted share.

On slide number four, you can see the impact of the continuing ramp for semiconductor capital equipment markets, that resulted in our revenues increasing sequentially by 40% to $148.4 million. We saw solid gross margin drop-through, although we have strong extended factory sales in the mix, and gross profits improved $12.7 million to $38.9 million, or 26.2% of sales. Research and development spending increased very modestly to $7.7 million, as we continued to build competencies supporting our significant LED and instrumentation initiatives.

Higher selling, general, and administrative expenses reflected firstly additional stock compensation expense in the quarter associated with the annual directors stock grant. This occurs each year, solely in our second quarter.

Secondly, higher unemployment insurance costs in the wake of our significant restructuring last year, and third, higher performance-based compensation expense, as we revise upwards our performance expectations. Sequentially before special charges, we moved from a small operating loss of $300,000 to a robust profit of $10.4 million, a return on sales of 7%.

Slide five, demonstrates how end market trends continue to be driven by strong demands from our semiconductor OEM customers, with 85% of revenues into semiconductor end markets and with three OEM's contributing about half of the share. Slide number six sets out how the revenues and operating profits before noncurring income and special charges bridge from the December quarter, our first quarter of fiscal 2010 to the March quarter. The critical solutions business provided additional operating profit of $6.7 million and $16.8 million of incremental revenues. At 40% slightly off our model drop through as a result of mix. We're continuing to cleanout the Legacy product situations to create the potential for this occasional mix performance. The systems solutions business proved $5.4 million of incremental profits on $25.5 million higher revenues. With the extended factory business firing on all cylinders in the quarter, we regard this as an excellent step forward for this segment.

Finally, our services business provided $400 million -- $0.4 million of additional profits on slightly lower sales from the benefits of growth of higher margin repair operations, as we exited some very low margin Legacy onsite labor service business. The drags on our sequential performance I've already referred to, these being higher unemployment insurance costs, higher stock compensation expense, and higher performance-based compensation expense.

Slide seven, shows the progression of adjusted EBITDA to 11.7% of revenues in the March quarter. The EBITDAR improvements over the past five quarters has been $44 million on $111 million of additional revenues. From a Reg G perspective, please note that the adjusted EBITDA reconciliations are provided as a supplement to each of our quarterly earnings releases.

We generated cash of $14.4 million in the quarter, as shown in slide number eight. Restructuring cash outflows were $1.4 million, around the level you should expect to see on a quarterly basis through the balance of the fiscal year. We utilized $8.3 million of additional net working capital in supporting the ramp, somewhat higher than planned as a result of additional inventories, arising from the deferral of a significant program with a major customer.

Cash flows from operations was $7.8 million. Additionally, we generated $7.8 million of cash from the sale of legacy intellectual property rights, of which we used $900,000 to acquire the residual intellectual property rights of privately owned blueshift. We anticipate those rights being highly complementary to our future plans for the robot business.

Capital expenditures for the quarter were $700,000 a modestly higher rate of capital spending is projected for the balance of the fiscal year, but full year spending should be less than $4 million. Looking at our critical balance sheet accounts as set out on slide nine, you'll note the growth in cash and marketable securities from $111.4 million to $125.8 million. This includes those securities classified as long-term in our balance sheet, which are nevertheless freely marketable and can be considered readily liquid. We continue to focus on effective working capital management as a critical path to enhance return on invested capital.

Overall, our working capital velocity improved with working capital reduced to 13.3% of annualized quarter sales. In this area of receivables, performance improved again, with a DSO reduction of four days, which limited the impact on receivables from increased revenue levels to $14.4 million. Inventories increased by $13.7 million, the most significant causal factors being the deferral of our significant customer program and some significant systems that had delivery dates shortly after quarter end.

Overall, inventory turns are headed in the right direction, improving from 3.6 to 4.2 turns. Days payable outstanding moved out one day, with payables increased by $19.8 million. Accrued restructuring costs decreased by $1.2 million from continuing cash payments.

The next three slides I'll briefly cover our sequential segment performance. On slide number 10, we summarize the sequential results of our critical solutions segment. The top line increased sequentially by 39% with the strongest growth once again in our vacuum and atmospheric robot product lines, that have greatest focus in semiconductor markets. Gross profits improved by $6.8 million to a margin percentage of 37.6%. Operating expenses increased by $1 million from higher corporate and shared service cost allocations, given the relative growth of the business. The segment reported segment operating income of $7.7 million, was 12.8% of revenues.

On slide number 11, we reviewed the systems solutions segment. Revenues here grew by 54%, heavily driven by sales to larger semiconductor OEM's from our expanded factory business. Gross margins improved by $5.5 million to $13.1 million, or 18% of revenues. The relative growth of this segment also resulted in higher corporate and shared service cost allocations. The result being a segment operating income of $4.1 million, or 5.7% of revenues.

The global customer operation results set out on slide 12 shows $400,000 of gross profit nongrowth on nominally flat revenues, with a mix favoring high margin repairs, as well as better margin performance from those repair operations, to gross margin improved to 21.2%. With the lower corporate and shared service cost allocations, the segment operating profit at last was narrowed to $0.5 million. After a focus on the past quarter, I'll provide some commentary on our outlook.

As Bob mentioned earlier, although the June quarter has come into much clearer focus, there's a degree of circumspection from some of our customers around the September quarter at this time. However, in evaluating the likely business levels to use for both our internal plans and external guidance, we add to these views the trends provided by firm bookings momentum, our unique insight into realtime manufacturing plans at our major OEM customers, through our expanded factory relationship, as well as the extensive contact we have with end users through our global field service network.

In terms of firm order bookings, those bookings were $151 million in the March quarter, a sequential increase of 11%, representing yet another quarter with book to bill over 1, a trend we see continued into April. Also, we've seen OEM manufacturing plans follow a tendency to trend up rather than trend down. Taking all the preceding into account, for the balance of the year, we see continuing growth in revenue and profits from second quarter levels.

In the June quarter, we're looking at revenues in excess of $150 million. That continuing growth, together with margin expansion, should result in adjusted diluted earnings per share before special charges of between $0.18 and $0.20 for the June quarter.

With the balance of profit improvements and reduced balance sheet investment to create those earnings, we believe we are driving increased value. As our return on invested capital, which was 18.5% in the March quarter should improve to nicely over 20% in the June quarter. And with that, I will turn the call back to Bob.

Thank you, Martin. As I said last quarter, we have a lot going on at Brooks. The first half of our fiscal year that began last September was dominated by the steep ramp in output to support the expanding needs of our semiconductor OEM accounts.

We expect that the second half will see an increasing emphasis on our strategic initiatives, be that improved cost price structures of existing products, or the growing impact of new products and increasing our penetration into new market segments. We have returned to solid profitability, and based on our shared view, both our own people and our customers, we are currently on track to meet or exceed the best operating financial performance delivered to our shareholders in the entire history of Brooks.

From the solid foundation that we now have, we expect to continue to grow the top line, enhance the bottom line, and accelerate the work needed to broaden our market reach and rate of future growth. Operator, we would like to now open the lines for questions.

(Operator Instructions) We will take our first question from C.J. Muse with Barclays Capital.

Good afternoon. Thank you for taking my questions. I guess first question, in terms of your improved visibility for the second half of calendar 2010, can you talk about the drivers there? I guess first, in terms of the confidence on sustainability for semis? Then also, can you talk a little bit about what kind of mix shift you see with new products in the quarter and I guess whether it's percentage wise or revenue target rice, how we should think about that.

I think we are seeing no particular major shift in the mix of our business going forward. We clearly see some movement from increasing our instrumentation business, both from momentum in its own end markets, as well as the introduction of simplicity solutions. We of course had minimal LED revenues in the first half. We see some increase in the second half of the calendar year, but still at modest levels.

That LED momentum will really come into play in fiscal 2011 and beyond. I think if you probably see momentum elsewhere that's in kind of some of the adjacent markets, such as data storage, where we see a nice degree of activity going on at the moment. So there's definitely a broadening out of where semiconductor related equipment is going beyond the very narrow band of end users with the drivers of the momentum in the first half of our fiscal year.

Very helpful.

C.J., as Martin suggested in his prepared remarks, we're feeling good through June. Level of uncertainty in the top line in the September ending quarter, questions about the December ending quarter. However, with a muted top line and with change in mix of products, reduction of impact the extended factory, we actually see pretty good bottom line even on a muted top line.

My follow-up question, how should we think about gross margin moving from year as extended factory moves, lowers the percentage of the mix? Any kind of guidelines you can provide there?

I would just suggest that you are going to see sequentially kind of similar rates of improvement that you've seen over the past couple of quarters increasing and as things improve probably even greater potential.

Thank you.

I think of, I think of it in terms of around about the rate of improvement you've seen in gross margins over the last couple of quarters.

Very helpful. Thanks.

We'll go next to Ben Pang with Caris & Company.

Yeah, just a follow-up on the previous question. If you look specifically at the extended factory, I think that was the one that you guys have about 18% gross margin in this quarter, is that right?

It's within the segment that has an 18% gross margin on a blended basis between the Brooks design systems and the extended factory systems.

What's the range that we can expect on that division of gross margin? What's -- what kind of -- where are you guys modeling that in terms of a range?

That business I think Bob made reference to in his prepared remarks is in the low double digits. It was performing well at that level. It has some upside, as we would further use capacity and have favorable mix impacts, but it's in that kind of range.

Okay. So kind of at the higher end of what your expectations are already?

It's already performing quite nicely, yes.

And then in terms of the SG&A, you commented that the current quarter, the -- adjustment for bonuses and things, what does the SG&A look like going into the rest of the year?

I think at you look at it being slightly moderated from where it was in the current quarter, but probably slightly more than we had in our first quarter as we have, as we're clearly adding bandwidth and capabilities to support the growth of the business.

Okay, and finally, is there a tax rate guidance for next year, or for the rest of this year?

I, I would say my best advice of the moment is the 7% rate that we suggested without the discreet items that we clearly, the benefit of which we got in the current quarter, although it's still the best to use at this point in time.

Thank you very much.

Thank you.

We'll go next to Satya Kumar with Credit Suisse.

This is Anfum here for Satya, I had a question regarding your lead times. With the recent increase in demand how are you lead times performing, I mean what have your expectations been from, say, three months ago to now? Hello.

Yes, hi. Lead times are clearly contracting, as the demands on our supply chain are coming much more in sync with the demands from our customer.

So you're not seeing any increase in lead times?

No, just the opposite.

Oh, okay. Thanks. Thanks. That's it.

Thank you.

We'll go next to Patrick Ho with Stifel Nicolaus.

Thanks a lot, and congratulations, guys, on a nice quarter. In terms of the LED business and I guess the building backlog you're probably seeing on that segment, Bob, what kind of confidence can you give me that as that starts coming out in terms of revenues that you won't I guess from the extended factory side see another type of these pressures from you got on the semiconductor side would that business pick up?

Well, our current extended factory operations that serve the semiconductor OEMs operate on a fairly simple model, although it is a lower margin model. The reason it is a lower margin model there is that we are producing customer design automation solutions. The work we're doing in the LED space is across the broad spectrum. We supply critical components and in our lifecycle solutions to, troche to MOCVD tools, we have Brooks-designed proprietary automation. And the business model is somewhat different there. And we provided some color in terms of the expectation of lifecycle solutions in a number of our public presentations over the last six months, and that model is playing out quite well for us.

Great. That's really helpful. And secondly, in terms of the balance sheet, Martin, once you guys start generating cash, I guess to your expectations, what's the thought of that use of cash, you know, again, once you get that growing on a going forward basis?

I think strategically that we believe, that there are a number of product gaps or enhancements that could build out this -- that becomes the first priority moving forward. It's with that in mind that we would see utilizing the cash that we build at this point in time.

Great. Thanks a lot, guys.

(Operator Instructions) We'll go next to David Duley with Merriman securities.

Yes. Could you guys review just a little bit about why fiscal year 2011 you'll see an increase in your LED revenues? Why is it tied to that fiscal year? And then second question, what were the percentages on the two big customers during the quarter?

I'll take the first part and we'll pass the second to Martin. What we are -- our reference is there to our significant acceleration, compared to 2010, we think that 2011 will be the first of a series of significant years in that space. As you see a fundamental change if terms of the incorporation of automation solutions in MOCVD tools. So the work that we have been doing in the past six months and continuing through this year really relates to at the system level an entire new generation of tools.

The next generation tools that come out, that will be more highly automated, perhaps cluster tools, you're going to have greater content in?

The need for automation is absolutely critical to meeting the cost targets, particularly for further deployment in the illumination sector.

And the percentage of the large customers?

David, in terms of our two customers that are over 10% in the current quarter, one of those was over 20% and one was in the midteens.

Okay, thank you.

Okay.

(Operator Instructions)

Okay. Well--

We do have a question from Hari Chandra-Polavarapu with Deutsche Bank.

Thank you. My question is in the context of your comments relating to uncertainty in the September quarter and questions for the December quarter. Have you heard about these questions and concerns from your major customers in the context of macroeconomic deterioration that we are seeing? And if not, what are you thinking about how much of a drive that it can impose into the back half of the year?

I think all of the participants in the sector have cautious about the second half and that certainly the caution expressed by our customers and public statements and our discussions privately with them are centered on the broader global economic conditions later in the year.

Okay, and in the context of what you have seen in the second half, where do you see more of the drive coming? Is it on the top line or is it on the margin?

Well, as we said, even with a muted top line, by nature of the activities initiated internally at Brooks, we see, even on a flat top line basis as an example, we would have sequential improvements in our bottom line, by those things that are within our control, changing product mixes,.

Thank you.

Thank you.

And there appears to be no further questions at this time. I will turn the conference back over to our speakers for any additional or closing comments.

Thank you, operator. And in closing, we just want to thank our participants for your support during the trying times and we look forward to sharing with you our future progress. Have a good evening, and thank you.

That does conclude today's call. We thank you all for your participation.