Azenta Inc (AZTA) 2011 Q1 法說會逐字稿

Good morning and welcome to the Brooks Automation earnings 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.

Good morning, everybody. I would like to welcome each of you to the Brooks Automation Inc. fiscal 2011 first-quarter financial results call. Our press release was issued after the close of markets last night and is available on our website at www.brooks.com, as are the illustrative PowerPoint slides to be 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 could cause actual financial results or other events to differ significantly from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor statement, the Safe Harbor slide on our website, and the Company's various filings with the SEC. I would also note we make reference to a number of non-GAAP financial measures which are used in addition to and in conjunction with the results presented in accordance with GAAP and should not be relied upon to the exclusion of the GAAP measures. Management believes these financial measures provide an additional way of viewing aspects of our operations when viewed with our GAAP results and reconciliations to GAAP measures provide a more complete understanding of our business.

Joining me on our call today is our President and Chief Executive Officer, Steve Schwartz. After I provide an overview of the first-quarter fiscal 2011 financials and a summary of our outlook for the March quarter, Steve will discuss our major accomplishments and near term areas of focus and the way they impact our positive outlook for the future. We will then take your questions. During my prepared comments, slide references relate to the PowerPoint presentation posted on our website to accompany these remarks.

As we reported in our press release issued after the market closed, the net income attributable to Brooks for the first quarter of fiscal 2011 was $23.5 million. While GAAP earnings per diluted share were $0.36, adjusted earnings per diluted share, excluding special charges were $0.37. Listed earnings were down slightly on a sequential basis at $23.7 million from $24.4 million. In both the first quarter of fiscal 2011 and the fourth quarter of fiscal 2010, the only items excluded from adjusted earnings are modest charges related to our past restructuring programs. As anticipated and indicated by our guidance for the quarter, revenues declined slightly on a sequential basis with reduced demand from a large OEM following their accumulation of significant inventory of certain of our subsystems in fiscal 2010. Excluding the impact of this item, we had modest revenue growth for the quarter. Our revenue growth was driven by demand from our smaller customers and the percent of our revenues to our largest three customers declined from 46% to 43%.

We drove margin expansion and this resulted in an improvement in operating profits before special charges from $22.6 million in September quarter, the fourth quarter of our fiscal 2010, to $23.9 million in the December quarter, the first quarter of our fiscal 2011. The $1.5 million increase in our income tax provision was in line with our expectations and together with reductions in foreign currency related gains within other income resulted in the $0.7 million sequential decline in net income attributable to Brooks. As slide four shows the sequential driver -- the significant driver in sequential performance this quarter was 170 basis points improvement in gross margin, taking gross margins to 32.1%. The gross margin improvements were secured across each of our segments and I will describe these more fully in a short while.

We continued with our investment in increasing engineering activities with both the hire of additional engineers and the commencement of a significant engineering outsourcing program. As a result, research and development expenses increased sequentially by $900,000. Operating margins improved by 100 basis points to 13.2%. The OEM inventory related revenue reduction arose in our extended factory business and as a result we saw the extended factory proportion of revenues ease slightly to just shy of 32%. The semiconductor components of our business remained at 84% of which 3% is MEMS. LED revenues improved whilst we encountered a reduction in industrial end market revenues. Slide number five shows how the revenues and operating profits, before nonrecurring income and special charges, bridge from the September quarter to the December quarter.

The critical solutions business provided additional operating profit of $600,000, despite a modest reduction in revenues of $600,000, driven by margin improvements and a favorable mix of products. The system solutions business reported a flat profits profile on a $3.5 million revenue reduction. This is the segment where we experienced the reduction in extended factory revenues. As we projected in our last conference call, we had an increase in royalty revenues that offset the profits impact from revenue reductions elsewhere in the segment.

Finally, our service business saw a surge of $1.2 million in profits on a $900,000 increase in revenues with expansion in margin rates and favorable mix. The segment also benefited from a service account in credit where costs were properly recognized in prior quarters. Slide number six charts the revenue adjusted EBITDA progress over the last seven quarters with a $47 million growth in adjusted EBITDA while margin revenue expansion has been $135 million. Adjusted EBITDA margins are now 16.8%. From a Reg G perspective, please note that the additional EBITDA reconciliations are provided as a supplement to each of our quarterly earnings releases.

Our cash generation was moderated below EBITDA levels by an $11.3 million build of inventories. Also, as shown on slide seven, capital expenditures for the quarter were $1.6 million. For the quarter, we built our cash position by $15.5 million. Looking at the selection of our balance sheet accounts as set out on slide number eight, cash and marketable securities as just discussed grew from $142.4 million to $157.9 million. This includes those securities classified as long-term on our balance sheet, which are nevertheless freely marketable and can be considered readily liquid. Our working capital velocity slowed to 17% of annualized quarter sales as a result of the previously referenced inventory build. Accounts receivable were reduced by $4.7 million as a major account became current again.

The build in inventories to $127.1 million while initially unplanned became evident mid-quarter as necessary to support continuity of supply, particularly in the case of a broad variety of printed circuit components and certain Asian sourced critical components. This set our inventory turns back to June 2010 levels at 3.8. We have action plans to bring inventory returns back to more appropriate levels and expect to report substantial progress during the March ending quarter. Accounts payable were again reduced with days payable outstanding at a low point of 45 days. This reflects the mid-quarter inventory build. Accrued compensation reduced from the end of fiscal year incentive compensation plan payments paid during the December quarter. Slide number nine shows that we have continued to have a very robust return on invested capital at an annualized rate of 36.7%. This is an important return metric as we manage for reverse growth with strong returns.

In the next slide, I will briefly cover our sequential segment performance. On slide number 10, we reviewed the sequential results of our critical solutions segment. The top line was approximately flat with cryopump sales growth offsetting some lumpiness in the demand for our chiller products. The chiller product lines will show robust growth in the March quarter fueled by the ramp in touch pad capacity. Gross margin expanded again and was 41.7% for the quarter. We increased engineering investments resulting in a $600,000 increase in segment operating expenses. The reported segment operating income for critical solutions was $13.5 million in the quarter and the operating margin improved sequentially from 16.5% to 18.1% of revenues.

On slide number 11, we summarize the performance of the systems solutions segment. Revenues declined in the extended factory for the reasons previously noted. The mix impact, however, resulted in further gross margin expansion to 23.9% from 22.9%. This fell through to the segment bottom line and segment operating margins expanded to 11.4%.

The global customer operations results are set out on slide number 12 and shows the impact of double-digit robust service revenue growth and significant margin improvement driven by material efficiencies. The blended sequential growth rate was 5%. The materials efficiency, regional mix, and an accounting credit for service costs all combined to boost gross margins to 32.2%. The segment reported a nice $1.3 million profit for the quarter.

Bookings in the September quarter were $184.9 million, a 4.2% sequential increase over the September quarter. I would like to go back and say those numbers were for the December quarter, $184.9 million, and that was a book-to-bill of 106. Further we see robust bookings in January and thus at this time project revenues of at least $185 million for the March quarter. Growth in markets will be LED, MEMS, and touch pad applications, while we project a higher percentage of revenues will be to our three largest customers. As shown on slide number 13, we believe those revenues will translate into diluted adjusted earnings per share of between $0.33 and $0.37. We expect gross margins to be between 31% and 32%, as the low extended factory mix components, service accounting credit, and overhead absorption into inventory will not provide the slight boost to reported earnings we saw in the December quarter.

We will continue to build operating expenses with increased research and development expenditures and a higher stock compensation expense related to the annual directors equity award. Again, the net of all of this will be a stronger quarter both in absolute and relative terms than we previously projected, a much stronger first half performance than we would have envisaged just three months ago. Designing wins, particularly markets adjacent to our traditional semiconductor core will have an increasing impact in the second half of the year and will help fuel a strong fiscal 2011. To give you a lot more color on this, I will now turn the call over to Steve.

Today, I would like to highlight some of the major accomplishments for the quarter, outline our near term areas of focus, and give some color as to what we see longer term. Our outlook for 2011 is stronger than we thought one quarter ago. You have heard already from many of our customers about how they see 2011 shaping up, and we'll benefit from this improvement in business and outlook. The magnitude of our success, however, will not depend solely on the growth of semiconductor markets and share gains in those markets, but also on the returns we'll generate from the significant investments we're making in our future.

We are focused on three major business thrusts. One, we're gaining market share in our current businesses. Two, we're expanding the market opportunities for our current products by aggressively providing solutions to applications in the rapidly growing adjacent spaces like MEMS, LED, and OLED, wafer level packaging, and active display, that leverage our product and technical capabilities. Three, we're developing new technologies that will both serve our current customers and current markets more productively, but will also allow us to take those technologies into different vertical markets that are not as closely tied to consumer electronics. Each of these growth paths require significant engineering and technology resources. We've increased our investment in these areas while we focus on achieving market diversity that the commitment to these areas will generate.

I first want to highlight the significant progress made in our systems business where we captured four new design wins. Two of these system wins were for semiconductor applications, one was for MEMS, and we added another LED application win. Two of these wins were at the expense of incumbent competitors, and two were designs for new products for existing customers. In our critical components business we're making great gains, notably in Japan, where we have historically faced strong competition, both in terms of product capability and price. Specifically, we won market share against Japanese cryopump competition on Japanese and US OEM equipment used in ion implant and deposition applications. In the quarter we saw very strong demand for our large vacuum chamber pumping solutions that drove record bookings of our polycold products sold to Japanese OEMs who supply systems for tablet display manufacturing.

We saw our next generation of energy efficient cryopump systems solutions successfully complete the first end-user and OEM evaluation tests, satisfying power reduction savings in the fab throughout the product life cycle. Production systems shipments commenced this quarter and other ongoing evaluations will ensure that pipeline is growing. Continuing our design wins in Japan, we shipped our first MagnaTran 7 and MagnaTran 8 vacuum robots to Japanese OEMs for new metrology and deposition products. We launched the MagnaTran 8 high capacity vacuum robot to target pay loads of up to 6 kilograms to address the needs of emerging TSV, LED, and OLED applications. We also had a new atmospheric robot win for LED with a Taiwanese OEM for a lithography tool application. We continue to make in-roads in our large robot business in Korea as we shipped a new Generation 8 robot to a Korean OEM for a tool going to an LCD fab in Taiwan, and finally we shipped the first of our production version of a cryogenic chiller solution used for cold semiconductor implant processing and the backlog is building for this application.

To summarize, in the quarter, we had 12 new design-in wins, 4 for semiconductor, and importantly, 8 for adjacent markets where we continue to engage, adapt, and design products for new applications. Importantly, our penetration into the new adjacent markets require sales, marketing, and engineering engagement far from Chelmsford and many of the players participating in these adjacent markets are new companies and not necessarily suppliers to the semiconductor market. We're taking full advantage of our global footprint to capture these opportunities. As a matter of fact, three of the new wins we had in the quarter were with first time customers for Brooks, and to give some idea as to the level of new penetration that's involved we're currently engaged in a design activity at customers in China, Japan, Taiwan, Korea, and four countries in Europe in addition to our ongoing work with North American OEMs. We will continue to adapt ourselves to be able to aggressively pursue these important markets wherever they are. It will take a while for some of these new wins to make a significant impact on our P&L, but our forecast is for continued growth every quarter in our adjacent businesses for the foreseeable future. In short, we have a lot of positive momentum and we look forward to more share gain and market expansion in 2011.

That concludes our formal comments, and now, we'll be happy to take your questions. Operator?

(Operator Instructions)

Patrick Ho representing Stifel Nicolaus.

Steve, can you just give a little bit of color in terms of some of these new adjacent market opportunities. I understand you're looking to broaden your coverage and expand into these markets, but what will that do to the business model? Is some of the earnings leverage going to be muted in the near term as you go into these new marketplaces?

Actually, I think the products that we're adapting are right along the margin profile and strong from a pricing stand point. Patrick, probably the biggest adjustment for us is -- for example, in a robot application, the way we adapt the products is for pay loads that are either much heavier or much smaller than a 300 millimeter wafer. I think we have good capability and technology to do that; and right now the products that we're taking, the business that we're taking, fits the business model really with small adaptations to current product offerings.

That's great from that point, but I am looking more -- you did mention R&D is going up at least in the near term as you add more field engineers. As the ramp into these new markets go, how much more can we expect in terms of those type of additions impacting the business model?

Yes, Patrick. Probably we'll go about $1 million more on a quarterly spend rate, and that will take us up to what we told you a couple of quarters ago about what we thought the right level would be for R&D.

Okay. Great. Thank you.

Edwin Mok representing Needham & Company.

Congrats on getting profits on the service business. I was just wondering how do we think about that business going forward? Are we going to maintain the service profitability there, and do you guys have a longer term operating margin target for service business?

I think we have longer term aspirations for this business that are really quite high. We brought in a new executive to run this business. She is very much getting her feet underneath the table and involved with this business. Really the impact of a growth strategy that kick starts this from prior pattern is something that you're unlikely to see before the back end of this fiscal year at the earliest.

We see that as a profitable growth strategy, so we see this as a very important part of our portfolio, an important part of the value add we bring to our customers and our contact with our end-user customers. So, I think you should see this as a business that we will expand both in terms of top line and bottom line with perhaps not much movement in it for the next couple of quarters.

Okay. Great. That was helpful.

And then on your guidance for the March quarter, gross margins down a little bit and EPS down a little bit probably because of this R&D investment, but you guide for revenue to increase sequentially. I was just wondering what are the moving parts for the gross margin that would help us with the guidance range?

Right. I think there was a three principle element that I identified during the course of my prepared comments.

First was that we had a particularly low extended factory mix in the December quarter. That will increase consistent with my comments about having an increase in our sales to our largest three customers. Secondly, because we see a reduction in inventory rather than an increase in inventory; that has an impact on over head absorption. So, we will have a less favorable over head absorption in the March quarter. Thirdly, there was this one exceptional service cost item that we benefited from in the December quarter to the extent of about $300,000 that will not be a continuing item in the March quarter.

Those are the principle elements. There's, obviously, behind and beneath that an awful lot of other dynamics product line to product line, but those are the three principle matters.

So I want to touch on those. If I can go through the items that you mentioned. A lot of them are one time events, if you will. The (inaudible) event happened in the December quarter. Would that imply that December quarter was a little bit of a [fall free] gross margin level and that 31% to 32% is already a more a normalized level that you see going beyond the March quarter?

I think the 32.1% was slightly high and abnormal for the level of sales we had in the quarter. Obviously, we get better absorption as we move forward. I don't see the 32% is something that we won't necessarily print again, but we're unlikely to print next quarter around the level of guided sales.

Okay. That's helpful.

Martin, one question on tax rate. How do we think about tax rate for this year?

You should be thinking about a tax rate of 3% to 4% for the current year.

One last question, I can't leave Steve without asking him something. Just on the new product wins, I saw you guys are gaining some momentum there. If you can you help us with two things.One is just between the various market LED, MEMS, et cetera, if can you rank which market has the most near term opportunity for this year and if you can quantify -- I think you talked about $40 million worth of potential revenue from those new activities?Any way you can update us on that number?

Sure, Edwin. The most near term one is LED and the largest one, followed closely by MEMS. We're seeing MEMS activity accelerate. Behind that is wafer level packaging. We see a great opportunity at the wafer level packaging, but that will probably follow on in the next year or two. The designing wins right now, we think are very important. We're still anticipating something around $40 million for these incremental businesses for this year, and we feel like we're on track. And we do expect considerably more in 2012.

Great. That's all I have. Thank you.

C.J. Muse representing Barclays Capital.

This is Srini calling in for C.J. Muse.

Just wanted to ask you on Steve's comments yesterday that you guys will be spending or you guys will be putting your balance sheet to work aggressively? What does that exactly mean, and would it be including any acquisitions and/or buybacks and anything else that could return value to shareholders?

We are beyond the stage of studying next opportunities for the Company. We think we have a couple of market opportunities we've identified where we'll be able to add considerable value. I think it is probably the most we can say right now is we're engaged in some pretty serious discussions with people who are potential partners for us to begin to enter new markets that are around the current technical capabilities we have.

Okay. Thank you. That's all.

Tim Arcuri representing Citi.

This is Wenge Yang for Tim.

First on the semis. Last quarter when you did the conference call, you mentioned a couple of quarters of flattish shipments, and you see June as the quarter shipments will pick up, so a lot of things have changed. What is your current view on the semi side in terms of shipments in next couple quarters?

Well, clearly we see a much brighter and stronger picture for semis than we did 3 months ago. When we're talking 3 months ago, though, it was not something that was going to impact the December quarter given lead times. It didn't, and we performed pretty much exactly where we anticipated guidance-wise. We're seeing some further strength in the March quarter as is evidenced by our guidance here, but we would see much more strength likely to occur into the June quarter, in particular, at this stage. So, we're seeing a strengthening position, and we're seeing all the signs that it has some degree of strength that is more than just a quarter or two and should result in a pretty nice near term picture.

Okay. With your current visibility, is there any signs of what the second half calendar year will shape up to be?

Only that I would say that I'd anticipate we see growth again in the June quarter above the March quarter at this stage.

Okay.

Regarding the LEDs, you mentioned $20 million to $40 million business opportunities in fiscal 2011. Does this number still hold true with considering you're gaining some more market share do you see this revenue outlook to be higher?

No. I would say it remains balanced, because I'd say we have an additional designing win and yet perhaps one of our other opportunities is a little moderated from where it was before. So, I think what we have talked about, which is the LED is the biggest part of this $40 million of adjacent market additional business, remains true and it remains within order of magnitude where it was 3 months ago.

Interesting.

Some of the right now LED market particularly the MOCVD market is going through a lot of turmoil and with a lot of concerns over channel subsidies and other issues. Did you get any indication from your OEM customers that with any incremental concern or weakness for calendar year 2011?

I think we're very much focused on the next generation tools, and I think for the first tool that comes out the first next generation tool, the order patterns we're receiving are consistent with the way they have been portrayed by the OEM previously. So, I think they see the new product launch which might be different than the overall business, I don't know, as still having the momentum they previously anticipated.

Great. One last question.

You mentioned about inventory issues at one of your top customers. Are those issues pretty much gone?

Our reduced shipments during the course of the December quarter righted that particular issue.

Any update on your lead time? Is that changing or pretty much the same?

I would say that if anything we got some slight reductions in lead times in a couple of our product lines. Our operations management is always being challenged to reduce lead times because we've become more nimble, more responsive, the further we can reduce those lead times. We're always working to do that. I wouldn't say there is any meaningful change other than one particular product line where we definitely have taken a couple of weeks out recently.

Great. Thank you.

Ben Pang representing Caris & Company.

First, on the gross margin, if you exclude the one-time $300,000 item that you commented on that would be discontinued after March, is the biggest toggle the percentage of business you're getting from your three largest customers?

It would be the extended factory mix is slightly more important than the overhead absorption issue, yes.

Does that basically just depend on whether these large customers still use the extended factory?

It depends on the profile of platforms that they have. And don't forget that our revenue recognition doesn't marry up with their revenue recognition. So, it is difficult to equate our shipment and revenue levels with the revenue levels that those guys project, so there isn't always a correlation. We have a tendency to be leading edge in the sense that -- and they may well then be making adjustments as they integrate and then for their own delivery and acceptance times.

Okay.

For some of the new design wins and new shipments you guys talked about, specifically in Japan. Do those type of customers generally go into the extended factory or are they able to go into your more standard product line?

No. None of those designing wins impact our extended factory business. Those are all proprietary Brooks products. So, at this time the extended factory is principally focused on a small handful of US OEMs.

What's your revenue contribution right now from outside of the US?

Not something I particularly focus on. It would be about 35% currently in terms of where the location of the shipment is going to.

Okay.

And the final question for me, when you talk about your growth opportunities, I think Steve laid them out in order, gaining share being the first one. Is that share gain primarily from the smaller companies or are you still able to gain share within the larger OEMs?

Ben, it's both. We're making more progress. It takes longer at the larger OEMs, but we're making gains for sure at the smaller companies and we continue to make improvements at the larger OEMs.

Thank you very much.

David Duley representing Steelhead.

Yes, just a couple housekeeping questions. Did you have any 10% customers during the quarter?

There were two 10% customers during the course of the quarter, so one of our three largest was less than 10% this quarter.

And the top three added up to 46%?

43% this quarter.

Thank you for that clarification.

Now, with a commentary on bookings being strong early in the quarter and also that revenue is going to be up in June, should we assume you have a positive book-to-bill in the March quarter?

We would believe that it is looking at this stage that that would be how the quarter would turn out, yes.

Okay. And in the March quarter, could you just describe a little bit -- I think what I heard was that, as far as the segments of revenue go, the extended factory is going to bounce back. Is that the majority of the growth sequentially coming in that segment?

No. It isn't the majority of the growth. It is a portion of the growth that then impacts the fact that we're just shy of 32% extended factory. It will be north of that number, but it doesn't represent all the growth. In fact, as you would, if you align where I said the bigger opportunities are, LED, MEMS, and touch pad, those are all opportunities serviced principally by our critical solutions business rather than by our extended factory business, our systems solutions business.

Okay.

And one final thing from me is, it seems we've had a lot of positive news about industry CapEx recently and I don't know exactly where the number is going to come out for 2011. But if the industry CapEx number, let's say is up now 15% to 20%, if it is going to be in that range, how should Brooks' semiconductor revenue grow?

I think we have given an idea of the model. Obviously, you could see some nice growth. I think if it is really strong in the back half, that's taking you north of the $0.75 billion to give some sizing to it. We just got to see how that comes through.

Thank you.

(Operator Instructions)

Satya Kumar representing Credit Suisse.

A few of the callers earlier tried to get color on this, but if I go back three months ago, I think you were already starting to see some strength in the June quarter with shipments looking up at that point. It looks like things are pretty strong this quarter and you saw some strength. I was just wondering, directionally, do you have any sense at this point in terms of visibility on how shipments might look in the September quarter?

How shipments might look in the June quarter?

June it's pretty clear, you're still saying looks up, but I think you were saying that a quarter ago. I was trying to see if we have a sense or any visibility on the September quarter in terms of directionally how shipments might look like?

I am sorry, we've got a problem at our end. I can't quite hear you.

I Apologize. Let many he try to speak up a little bit.

I think a quarter ago you were saying that you had pretty good visibility into the June quarter with shipments looking up, and seems like orders are pretty strong so far. I was wondering if you have any visibility at this point on directionally how September shipments might be looking at this point?

No. We really do not have any visibility into that period. I think the comment three months ago was that we were hearing our OEMs talk about a strong June quarter at that time, not that we had any particular visibility through forecasts or bookings. I think at this stage everyone is kind of scrambling around trying to digest the news that's come at the end-users, which hasn't necessarily filtered through to particular OEMs as to who are the winners and who are the losers from those particular overall CapEx directions that have been provided. So, it is difficult for us to evaluate at this juncture.

Okay. You talked a lot about design wins in the business, and in particular I thought you said you had won some cryopump wins with Japanese OEMs for implant equipment? I want to make sure I understood that correctly.

Also was wondering, could you add more color to that in terms of how you see the opportunity ramping in terms of volume? Is that as small opportunity or do you think that can be reasonable?

That was an important share gain, if you will. We worked directly with an OEM to prove the capability or, sorry, directly with the Fab to prove the capability of the pumps and it helped us to secure the wins, if you will, at the OEMs. It will be important business. It is important from market share gain. It won't make dramatic impact, but it is just one more win for us at yet another OEM.

That's very helpful. Thank you.

With no further questions at this time, I would now like to turn the call back to Mr. Stephen Schwartz for closing remarks.

Everyone, we thank you for your time and interest in Brooks and we certainly look forward to speaking with you next quarter. Thank you.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.