Azenta Inc (AZTA) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Brooks Automation third quarter financial results conference call. My name is Caris and I will be your coordinator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, today's call is being recorded. And I would now like to hand the call over to your host for today, Mr. Martin Headley, Chief Financial Officer. Please proceed.

Thank you, Caris and good afternoon, everybody. I'd like to welcome each of you to the Brooks Automation fiscal 2011 fourth quarter results call. Our press release was issued after the close of markets today, and is available on our site, www.Brooks.com, as are the illustrative PowerPoint slides to be used during our call today.

I'd like to remind everybody that during the course of the call we will 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, the Safe Harbor slide on our website and to the Company's various filings with the SEC. I would also note that we are going to 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, and should not be relied upon to the exclusion of those GAAP measures. Management believes those financial measures we provide an additional way of viewing aspects of our operations that when viewed with our GAAP results and the reconciliations to GAAP measures, provide a more complete understanding of our business.

With me today is Brooks' President and Chief Executive Officer, Steve Schwartz, who will open with remarks around the business environment and our current initiatives. I will then provide an overview of the fourth quarter and full-year fiscal 2011 financials, and a summary of our financial outlook for the December quarter, our first quarter of fiscal 2012. We will then take your questions. During our prepared remarks, we will, from time to time, make reference to the slides available to everybody online at www.Brooks.com which are intended to assist in clarifying our comments.

With that, let me introduce Steve Schwartz.

Thank you, Martin.

Today, I would like to give a brief update on results from our strategic initiatives, and give some commentary as to how we see our December quarter coming together. Fiscal year 2011 in many respects was a very strong year for Brooks. We grew revenue to $688 million, an increase of 16% from last year, achieved record cash flow from operating activities of $88 million, ended the year with cash and marketable securities of $206 million, or $3.17 per diluted share. And no debt. We successfully sold our lower margin contract manufacturing business, and acquired that businesses that formed our higher-margin, Life Science Systems platform.

Unfortunately, these positive results have recently been overshadowed by the slowdown in semiconductor capital equipment spending, which has been significant. And consistent with the reports from many of the companies who serve our same customers, we believe that semiconductor-related revenue in the December quarter will be lower than the September quarter. In spite of this challenging economic environment, we are pleased to report our September quarter Life Sciences revenue was slightly ahead of our expectations, and our integration activities are well underway. Although cost reductions and margins on some orders were less than had been projected. Also, we've continued to make progress against our strategic initiatives that we outlined for you at the beginning of fiscal 2011 -- to gain market share in our existing businesses, to expand into high-growth markets, and to drive gross margin improvements in all of our businesses.

I'd like to spend a moment to highlight some of our design win activity that is a result of our RD&E initiatives. Even in a down business environment, we had another strong quarter for wins in our core business and I'll highlight a few of those penetrations here. We had six new automation systems design wins. Two for mass packaging, two for LED, one for an advanced nanotechnology application and one for a semiconductor front end application. We received orders for three more 450 millimeter systems. Two of which were vacuum systems, and one was for a front-end application. We are actively engaged in 450 millimeter design activity within another five customers at this time. Although we continue to believe that the market for significant volume of 450 millimeter products is still some years away, we are ready now with products for customers who need automated platforms. We feel that it is important for us to have developed products in advance of the market need.

For the entire fiscal year, we recorded a total of 79 new design wins and we added 18 new customers. We are particularly pleased with the success of our expansion into markets beyond the front end semiconductor market segment, into what we refer to as adjacent spaces, like active display, LED, MEMS and advanced packaging. Revenue from these adjacent segments grew throughout the year to the point where it represented 32% of our September quarter revenue. Even slightly ahead of our aggressive internal target. When we include the contribution from our new Life Science Systems business, fully 38% of our September quarter revenue was generated from markets other than front end semi. We are pleased with the aggressive transformation that we have been able to achieve, and we will continue our investments that are enabling us to gain market share.

This success in adjacent spaces is the result of our adaptation of what we've done for a large diameter silicon wafers and flat panel display glass being applied to various other substrates. Like smaller scale glass, small diameter sapphire wafers, silicon wafers that have been thinned to the point of being flexible, as well as high mass payloads like generation [seven] glass and large diameter susceptors. We have simultaneously been able to expand our served market and capture share along the way. In fiscal 2012 we plan to continue to invest at approximately the same level of RD&E in these core and adjacent markets. But, once again we will continue to channel more of these dollars toward new product development and design win activity and less toward sustaining and compliance for older product lines. This is a formula that worked well for us in fiscal 2011, and we have an active design and development pipeline to start fiscal 2012.

In terms of market diversification outside of the semi and adjacent markets that we have served, we finalized our acquisition of Nexus Biosystems at the end of July. We have diligently worked to speed the integration into Brooks. After a thorough evaluation of overlapping skills and capabilities with RTS, which we acquired in April, we are making changes to align a single organization around this market opportunity. In the September quarter, we took some significant actions to reconcile the worldwide Brooks Life Science Systems Group and most of the impact of those changes will make their way through the P&L by the end of the December quarter. We continue to be pleased by the market position and the power of our combined RTS Nexus capability. The December quarter will be our first full quarter with Nexus and RTS together, and we anticipate that our Life Science Systems revenue will be in excess of 10% of our total revenue for the quarter. So, already a meaningful contributor to our business.

Most importantly, we are fully engaged in activities to ensure the performance level of our Life Science Systems installed base. We are making extra investments to be sure that our first products, recently installed at some extremely important customers, are supported at a level that will ensure their success and ours. Martin will give some additional color to these startup costs in his remarks.

In this new and rapidly growing market, we are competing for business all over the world with the broadest portfolio of automated compound and biologic storage systems in the market. With 170 systems in our installed base, we're the global market leader in the automated sample management space. To date, a vast majority of the installed systems are used for chemical compound storage, and that will continue to be a steady market in the coming years. However, the segment that is growing the most rapidly, is for the storage of biological samples and the demands from the market for systems used for bio storage differ markedly for those used for compound storage.

With this in mind, we've already begun to integrate the combined R&D strength of our Brooks Automation and Brooks Life Science Systems Groups to enhance the performance of our current bio storage products. At the same time, we're developing a road map for future offerings across the board to better serve this rapidly evolving, high growth market. The sales cycles for these sample management systems are longer than for our other products, typically 9 to 18 months, but our opportunity pipeline is robust and we are actively participating in all major opportunities.

I'd now like to give a little bit more color on our outlook for the December quarter. Our business slow down from semi and LED began in the September quarter, and we've been able to manage the change in an orderly fashion. However, one business segment that was, for a while anyway, out of cycle with these markets was the active display market for tablet computers, where there's been an aggressive build out of fabrication equipment for the glass coatings that form the active display. These coatings are applied in large vacuum chambers that utilize our cryochillers. For most of the last two years we've seen consecutive quarter-on-quarter growth from our cryochiller business, however this business will be down in the December quarter. We anticipate the decrease from this market will cause our revenue from this business to go from an all-time record of almost $14 million in the September quarter to approximately half of that in the December quarter.

Nonetheless, we're pleased with the market share we've gained in this advanced display market, and we're in the process of launching new products into this space, which are more energy-efficient, have smaller footprint and provide us with higher gross margin. We're in a good position for the rebound in this business, which we anticipate may start as early as the first half of calendar 2012. As I mentioned, we see this as a pause in CapEx spending in this rapidly growing segment, and although the decrease in this business will have a significant impact on our financial performance in the December quarter, we expect improvements in other areas of our business to offset some of this decrease.

Before I pass the call over to Martin, I want to reiterate that compared to a year ago we're a different company on a different trajectory. We have exited a low-margin contract manufacturing business, entered high-growth life sciences field where we're advantaged and we're gaining market share in the space. We have significantly increased the gross margin profile of the Company, and we're generating strong cash flow and using it to make the investments in new product development and acquisitions that will enhance our market positions.

We are poised to continue to grow market share in 2012 and we believe that it's important to continue to invest in RD&E for new product development and to make improvements to our internal operations and supply-chain capability. We will, however, manage our costs carefully in this uncertain business climate to make sure that we closely couple our investments through the returns that we generate.

I'll now turn the call back to Martin.

Thank you, very much, Steve.

With our ongoing transformation of the Company, there are a lot of moving pieces reflected in the financials. Our results also incorporate a significant industry slowdown for semiconductor LED and data storage manufacturing equipment. Adverse performance against our assumptions as to the margins of certain new products recently introduced by the Life Science Systems business, the pace of restructuring changes reflecting themselves in the income statement, and the precipitous decline in MOCVD tool sales after the recent LED capacity build, all had a major impact on our performance in the quarter, and, as a result, we missed the bottom end of our guidance ranges for both revenues and adjusted EPS.

The actual results for the quarter were adjusted diluted EPS of $0.19 on revenues of $131 million. Slide 3 show some of the significant events recognize in the September quarter financials. Nexus Biosystems was acquired effective July 25 and thus the quarter reflects 2 months of trading activity and costs associated with a significant integration restructuring we commenced to merge this business together with our prior acquisition, RTS, and the Brooks engineering, financial, and management resources that will drive new product development and operational effectiveness.

The slowdown in the semiconductor markets, was at the low end of our projections for the quarter. Our semiconductor product revenues declined by 27% from the June quarter levels. The shortfall in LED shipments at the end of the quarter was considerable, reflecting the market conditions noted by our OEM customers in their revisions to their own forecasts for LED shipments. We continued enhancing our product development capabilities through fiscal 2011, and with the full quarter of Nexus spend in December, we will reached an investment level with which we have comfort. We also initiated a substantial supply chain initiative, and are at the earliest stages where we are making investments through consultants and supply-chain management, which will only yield meaningful savings to cost of goods sold later in fiscal '12. Away from operations, will favorably resolved a long outstanding foreign income tax uncertainty and recognized at $2.8 million benefit in the quarter.

Turning to slide 4, I want to describe how our sequential revenues and operating profits before special charges developed from the June quarter, our third fiscal quarter, to the September quarter, our fourth fiscal quarter. In the June quarter we recognized $42.3 million of revenues and $2 million of operating profits from the contract manufacturing business that we divested toward the end of that quarter. In the September quarter we recognized $6.3 million of incremental revenues and incremental losses of $1.5 million from our Life Science Systems business. This was significantly impacted by acquisition accounting and I'll address this with more granularity later in my prepared remarks.

The Brooks Global Service business continues its recent trends of solid top-line and bottom-line growth, with a $1.4 million or 6.1% sequential increase in revenues and returning half of that revenue increased as incremental profits. The core Brooks products businesses were down $20.5 million, or 17.3%, with the semiconductor declines offset by growth in mixed gas cryochillers, headed largely to smartphone and tablet manufacturing capacity expansion. We limited the drop through on the revenue declines to $7.6 million, or 37%. The ramp in the Brooks product solutions engineering expense was $800,000 over the third quarter, and consulting costs and other initiatives resulted in an increase in SG&A expenses of $1.7 million.

Our ongoing business transformation has had significant impacts on our income statement ratios as demonstrated by slide number 5. Gross profits, before special charges, grew as a percent of sales from 30.8% to 37.1%. Largely by subtraction from the divestiture of contract manufacturing business. Our heritage businesses, Brooks Product Solutions and Brooks Global Services, performed at a roughly flat margin rate despite the volume roll off. Brooks Life Science Systems depressed gross margins on a GAAP basis, as a result of acquisition and counting and integration adjustments while the underlying margins were ahead of our heritage businesses.

Research and development expenses increased to 8.8% of sales with the dollar increase pretty evenly split between the additional expense from the Nexus business, and increases in the BPS spend I just referred to. Selling, general and administrative spending reflects both divisional G&A costs for Brooks Life Science Systems, increased amortization for the Nexus acquisition, and higher consulting costs. Operating income before special charges at $9.7 million, represented a 7.4% operating margin in a difficult quarter.

There is a significant impact of nonrecurring items on the sequential earnings comparatives and these are summarized within slide number 6. The $42.6 million after-tax gain on sale of the contract manufacturing business was unique to the third quarter, while the tax benefit from resolving past foreign tax uncertainties was offset the fourth quarter by acquisition accounting and merger and integration expenses related to Brooks Life Science Systems. Although this had a net zero impact on the quarter, they clearly had significant impact to individual line items. Other income and net interest income was slightly unfavorable without the litigation benefit reflected in the third quarter. As planned, we had an underlying tax benefit in the fourth quarter. Overall, net income attributable to Brooks on both GAAP and adjusted bases was $12.1 million, or $0.19.

The difficult market environments and the complexity of transitions with both acquisitions and a divestiture rounded out a very successful year that is summarized on slide number 7. We grew revenue by 16% to $688.1 million. The heritage products and services business is grew by 24% to $540 million. We grew adjusted gross margins from 28% to 32.7%, this was slightly assisted by our transformative acquisitions and divestiture, but we also expanded our heritage products and services margins from 34% to 37.7%. Operating profits before special charges increased by 68% to $83.2 million, and once again, nonrecurring gains more than funded special charges.

Our joint ventures performed well, providing $2.6 million of the increases in income below the operations line, both through their share of profits and management fees. Our income tax provision, excluding one-time benefits arising in both years, was modest and should remain so for fiscal 2012. Overall, GAAP net income more than doubled and adjusted diluted EPS increased from $0.78 to $1.32.

Fiscal 2011 was also a record year for EBITDA and cash flows. Our full year adjusted EBITDA was $111.2 million, with $17.7 million earned in the fourth quarter, and cash from operations for the fiscal year was $87.6 million, although we were short of our aspiration for the fourth quarter. The most significant impact, as shown on slide number 8, was the increase in inventories, excluding acquired inventories of $7.9 million. This is reflective of late September push outs in systems that were not picked up on a timely basis by a number of our customers, as well as raw materials receipts that could not be rescheduled as the demand declined late in the quarter. Focus in the December quarter will be on rectifying these various situations. Fortunately, applications and the daily grind of collecting receivables on-time provided $10.4 million of cash flow. Capital expenditures of $2.3 million, should be typical for upcoming quarters.

The quarter also saw the initiation of our dividend payments, this continues with the announcement of an $0.08 dividend for the fourth quarter, payable on December 20, 2011 for shareholders of record on December 9, 2011. Cash and marketable securities reduced by $77.6 million over the quarter, with nearly $87 million in outflows related to M&A activity. We closed the fiscal year with $205.8 million of cash and marketable securities. This excludes restricted cash, and thus this amount is all considered relatively liquid.

The transformation of the business already producing results in diversification and dilution of customer exposures is illustrated by the chart and table on slide number 9. We had no greater than 10% customers in the quarter, and the three largest semi front-end OEMs represented 19% of our business in the fourth quarter as compared to 47% in the fourth quarter of fiscal 2010. For this purpose we attribute the end OEM as our customer since they make the designing decision, rather than any intermediary contract manufacturer they may utilize, who is technically who we invoice for the sale of component products.

Diversification of end market revenues has progressed to the point that semi front-end products were less than 50% of revenues in the fourth quarter. And the Brooks Global Service revenues, which are more stable and largely directed to the end-user fabs and foundries, was 17% of total revenues. Industrial revenues were robust at 18% of total revenues, with a record quarter of mixed gas cryochillers, and other markets included LED, MEMS and solar, which represented, in total, 11% of revenues. A partial quarter of Nexus drove Life Sciences to just over 7% of total revenues. Life Sciences should be more than 10% of our total revenues in the December quarter.

Turning to our segment operating performance, our first attempt to extract the underlying performance of Brooks Life Science Systems without fair value accounting and other integration adjustments required to present our GAAP financial statements as a result of the acquisition activity. I'll speak to the reconciliation presented on slide 10. On a GAAP basis, Brooks Life Science Systems recognized $1.6 million of gross profits, and $8.5 million of reported revenue, and after $5 million of operating expenses, the GAAP consolidated income statement reflected segment operating losses of $3.4 million. However, given the nature and status of the contracts we acquired, and inventory charges recorded, we made various purchase accounting adjustments. Excluding those adjustments, the underlying performance on a go-forward basis was a somewhat healthier gross profit of $3.5 million on $9 million of revenues resulting in a segment operating loss of $1.5 million.

The quarter suffered from lower underlying margins before acquisition adjustments than we had projected. These margins, at 39%, were weighed down by higher support costs around some new product releases, and some low-margin sales inherited by Brooks. Although we've reduced headcount in the business by nearly 10% since making the acquisitions, little benefit flowed into the quarter given the timing and accounting for certain European work practices.

On slide number 11 we review the sequential results of our Brooks Product Solutions business. Where sale of pumps and robots into the semiconductor and data storage markets were in decline with semi front-end revenues down 27% sequentially from the June quarter. Margins were sequentially flat with favorable mix and reduced warranty costs, offsetting the overhead absorption challenges of lower volumes. Increased engineering spend and consulting in support of operations improvements initiatives are the primary drivers behind the operating expenses increases in the quarter. Overall, the segment produced $8 million of segment operating profit, that's an 8.2% margin rate.

The Brooks Global Services segment produced strong sequential results again as shown on slide number 12. Following strong pump repair growth in recent quarters, the robot repair business produced double-digit revenue growth that was partially offset by declines in end-user spares. This lack of decline is a trend we anticipate continuing into the December quarter. Favorable margins of the use of reserved inventories drove gross margins to a higher level of 36.2%. With approximately flat operating expenses, the business reported $4.2 million in segment operating income with the operating margin rate climbing to 17.6%. Looking forward, we enter the December quarter after a weak bookings quarter. Our bookings were $110.3 million. However, were also buoyed slightly by revenues early in the quarter from late quarter push outs and product pickups that failed to occur at the end of September.

We are all painfully aware of the macroeconomic volatility, and this is translating into very poor visibility to customer commitments and frequent requests for a quick response once customers have made commitments. This is all baked into our guidance that is shown on slide number 13. The December quarter will be even tougher than the September quarter, given the macroeconomic uncertainties that are a drag on capital spending decisions. We anticipate a further 7% to 12% decline in our total revenues, with the growth in Life Science Systems being offset by reductions in sales of mixed gas cryochillers, arising from a pause in the very aggressive capacity build for tablet computers. We also see another double-digit decline in demand for semiconductor front-end equipment. As a result of the above, we project December quarter revenues at $115 million to $122 million. With an adverse mix profile in both Life Sciences Systems and our Brooks Product Solutions, and some raw materials price inflation, we now project adjusted diluted earnings per share of between $0.05 and breakeven.

With that, I'll now turn over the call to questions. Thank you, operator.

(Operator Instructions).

Questions will be taken in the order received. Edwin Mok. Please proceed.

So, my first question is on the Life Sciences business. Obviously, you guys are just starting the business and it's not profitable at this juncture and you had talked about this coming quarter, it's going to be more than 10%, obviously growing quite a bit with a full quarter Nexus. I was just wondering, how do you think about profitability of that business, and when do you think, or at least what revenue level do you think you need to achieve for you to hit, let's say the high 40% or the 50% gross margin that you guys talked about?

I don't think achieving those margin levels is solely an absorption issue. It's also operations improvements and completing the integration so, we were anticipating lower margin levels, that are slightly below our initial expectations, where we thought they would be in the low 40s, being that 38%, 39%. I think we're couple of quarters away from that.

I think we've perhaps found the challenges slightly more, but not markedly more, than we anticipated and it's just delaying that, but nothing that we believe that is insurmountable, and certainly nothing that takes us away from believing that we're able to harvest the potential we saw in these businesses when we made these acquisitions.

I see. And, I think I remember last quarter you guys talked a little bit about seasonally September is a slower quarter, right? And if I just use 10% of your midpoint of the guidance, which is roughly around $12 million, is that how we should think about kind of a normal run rate of this business? And obviously, you guys are still growing and going after new business, but just wanted to kind of get a sense if that's level that we think -- and before growth, the run rate?

Well, I think you might anticipate a little higher revenues than that for the December quarter. We've made reference to it being seasonally a little higher. So, we definitely view this business as being above the trailing revenue rate which was $48 million. We're seeing the bookings come in and the growth start to realize. If you recollect, we talked about this having a growth potential of 18% to 20%, and we would not back off that kind of compound annual growth rate for this business, and we believe the top line will grow nicely.

Great. Very helpful there. And then just moving onto your other products, you mentioned that on the semi cap side of the business to do expect double-digit decline, right? And we've heard from some your OEM customers talked about order picking up in the December quarter. How do you kind of reconcile that and is it inventory adjustment on your customers' side, or do you expect business to trough in the December quarter? If you can kind of help me with that?

The current way we view a very uncertain world is that we'd anticipate the business to trough, if we interpret what our customers are saying correctly. We clearly, like everybody else, feel uncomfortable with the macroeconomic conditions, and I think everybody is going to have to be very nimble in these situations, but at the moment, our best view would be that December is probably a trough quarter.

Great, I have one last question and I'll go away. Just in terms of operating expense, how do you kind of think about that? Obviously, you still have to investment in some of these new products that you guys are developing, especially in the Life Science area? Do you anticipate your OpEx to go above this, excluding restructuring charges, little less than $40 million level in the coming year? And, how much more do we expect OpEx to increase?

I would say if you look at our engineering spend, apart from a small impact from the full quarter impact of the Nexus acquisition, you probably see engineering running at roughly order of magnitude the rate that we previously expected. I think you're going to see a couple of quarters of slightly higher SG&A as we pursue some of these other initiatives.

But, equally, we're working on other initiatives to drive that down over time. It gets driven down a bit as we start to recognize the cost savings from the actions we've taken in Brooks Life Science Systems. So, I would say overall you are seeing something that's closer to the peak, and we will obviously adjust it to the market conditions we see, as well. So, other actions will be taken as necessary.

Actually just to clarify that, you mentioned that you'd taken some action recently, right. Is that something that we should expect to have a benefit in the December quarter? Or is it more like the March quarter and beyond?

I think it's more the March quarter before you start to see them.

Great, thanks for clarifying that. That's all I have. Thank you.

Thank you.

C.J. Muse. Please proceed.

Hi, it's Olga. Thanks for taking my questions. Just to clarify some of the comments regarding the December quarter guidance. It seems like the EPS is partially down by higher income tax. Can you talk about what the tax expense you're embedding in the guidance, and how you think about that heading into 2012?

Okay, I'm embedding within our guidance a continuing tax rate for the full fiscal year of 3% to 4%, with it being at the higher end of that range in the early quarters, and we typically will have a small benefit recognized in the fourth quarter.

Got it, and then switching gears into the gross margin side, you talked about some of the inherent costs within Life Sciences and some of the mix issues dragging down the gross margins there below your expectations. At the current run rate that you are anticipating from a revenue standpoint, do you see fiscal '12 gross margins even getting to the mid-40s or should we assume low 40s is kind of a more achievable target for this coming year.

I think for the full year as a whole you should expect mid to low, or low to mid-40s, if that kind of range. So, it's more towards the low than the mid-40s.

Got it. And then just a final question, on the semi equipment side, how would you characterize the inventory levels at your customers of your, of Brooks components? Have they worked through most of the inventory or --?

There are relatively few systems, although there are some, and our knowledge of the rate at which those are expected to move during the December quarter is in fact factored into our guidance. On the component side, we believe it to be a relatively little, almost nonexistent of the robot side, and relatively modest at this stage in the pump side, given the rate at which pump revenues declined during the September quarter. And so, we believe at the component side we've seen the vast majority of any inventory correction that we are going to see.

Thank you.

Thank you.

David Duley. Please proceed.

Yes, could you give us a little bit more detail on how you think the revenue is going to break out amongst the pieces you showed in the pie chart for the December quarter?

You mean by market?

Yes.

I would say that clearly we talked about in prior conversation, or prior question from Edwin, you're looking at over a $12 million of Life Sciences, over 10% of the business will be Life Sciences. I would say that we see the declines in the semiconductor business being more rapid than it is in the adjacent markets, but you're also going to see the industrial piece shrink by virtue of the mixed gas cryochillers, and Steve gave the road map there that that's roughly $6 million to $7 million of decline there. So, that's going to take that down by a few percentage points.

So, when you take that into account, semiconductor comes down very slightly, Life Sciences up fairly significantly, other adjacent markets up slightly, and industrial down. BGS having a consistent top line on a declining product revenues is going to expand slightly as a percentage.

And the gross margins you talked about, low 40%, was that for the Life Science business or for Brooks total?

No, that was for the Life Science business. That's what I thought I was addressing there.

Okay, and did you say that the service business was going to expand as a percentage of revenue?

As a percentage of revenue, yes.

Okay. And, when the semi business recovers, would you expect, how many 10% customers would you ultimately expect to have again when the semi business gets back to a normal run rate?

By definition, viewing a customer at the end OEM that takes a complete tool and not any intermediary contract manufacturer, we do not anticipate any 10% customers.

Okay. That's it for me, thank you.

Thank you.

Wenge Yang. Please proceed.

Hi, thank you for taking my question. I look at the operating expenses, and try to figure out what's the reason behind higher operating expenses in the quarter, and could you provide a little bit more explain on why it is higher than your guidance, and how it's going to track in the next quarter?

Okay, the operating expenses, if you look to the Brooks Life Science Systems, there are $5 million of operating expenses in the quarter that come from Brooks Life Science Systems. We put our consulting and other supply-chain initiatives associated with operations improvement, those costs are reflected in our selling, general and administrative expenses. Those are between $1.5 million and $2 million.

We had added investment in our engineering for the Brooks Product Solutions as we really got close to completing our increase in expertise and capacity for product and supporting our new design and win opportunities, and that was $800,000. So, those were the most significant pieces of the operating expense increase sequentially.

In terms of versus expectation, we spent a bit more on the supply-chain initiatives than we anticipated going into the quarter. And, as I described, around Brooks Life Science Systems, we did not get the accounting benefit for a number of the actions that we've taken. In terms of restructuring headcount.

Okay so, for fiscal Q1, for the Life Science, the $5 million increase, actually this $5 million will become actually a little bit higher because you're taking the full three months coming off the Nexus operation, right?

Correct.

What about that consulting expense? Is it going to go away for the quarter?

No, that will be at a similar level as the part of this very essential program to improve our supply chain operations' effectiveness.

Okay, okay. This seems to be a little bit higher than when you've guided in the last quarter. Is this because you fully integrate Nexus and found out that expense of that operation is higher than you expected?

I think there is that, and we've also decided that the impetus on our operational initiatives needed to move forward rapidly once we'd embarked on this activity. This isn't something that can be done slowly over time and therefore we've given it substantial investment.

And you mentioned your seasonal effect of your current cost cutting efforts is starting in the March quarter, correct?

From the point of view of the Brooks Life Science Systems, you also should probably see a slight roll off in some of the other costs there. And we're also looking, as we move through this quarter, obviously in a difficult time, at other actions we may take, so we'll be addressing this as we move forward in the fiscal year.

Okay, understand. The second question regarding your comment on the December quarter is going to be the trough. Is this just based on the comments from your suppliers, or you actually see signs of your own orders that's going to pick up beyond the December quarter?

This is not on the basis of bookings we have in-house. This is on the basis of what we have been notified by critical customers of their purchasing plans and manufacturing plans for the quarter, so, clearly, all bets are off until the bookings are actually received, and frankly until the product is delivered.

But, the indications from our customers and some of the public pronouncements, as well as seeing, for instance, solid indications of a known new CapEx planning career, all give us rise to think that the correct statement to say that this is the trough, but it is equally possible that it isn't. But, those are the indications we have at this moment.

Understand. Just last question, you made a comment that LED is dropping pretty fast, and how much revenue is coming out of LED, and what do you see this in the next two quarters?

I think it's not that LED revenue for us is dropping fast. It's the fact that this was going to be a substantial growth engine for us. In fact, one of the concerns we'd previously had about the market adoption of multiple reactor tools is largely being overcome with a favorable response to those tools. It's just that there aren't that many reactor counts being shipped currently. So, it means that our growth opportunity is not transpiring as we originally believed it would rather than we see declining LED revenues.

Okay any indications that this trend will continue, or it could bounce back up?

I would have to say if we think visibility is short in semiconductor our experience in LED is it's even shorter.

Okay, thank you.

Sacha Moore. Please proceed.

-- Hello?

Hi, Thanks for taking my questions. What type of product gross margins are we looking at in the December quarter?

I don't think we're providing guidance, granularity on that at the moment. Depending upon the final mix, that's one of the uncertainties that embodied within our range. Our range is the mixture of the mix of product, as well as absolute level at the top line. But, you would anticipate with declines, that in the top line, it's going to be down somewhat -- I don't think were in a position to provide guidance around at the moment, Sacha.

I assume the Life Sciences were slightly higher gross margins, and services were sort of flattish, would be a reasonable sort of --?

I think that's a reasonable assumption, yes.

Okay. I was intrigued by your comment on the cryochiller market going down in the December quarter. Was wondering if you can give us some perspective as to how big that market was for you, perhaps this calendar year and you mentioned it was growing from last year, so I was wondering if you could also give that?

Well, I think as Steve made mention of in his prepared remarks, this had grown, this business line for mixed gas cryochillers had grown to $14 million at its high. And the majority of those revenues were for these applications.

Yes, Sacha, just to give you some color, in the first quarter of the fiscal year we had around $8 million of revenue. It grew to approximately $10 million, approximately $12 million, approximately $14 million, so steady growth just through the fiscal year.

Okay, and it was growing sort of last year as well from pretty low levels?

It grew for a couple -- about three quarters before that as well.

That's right.

Steve, do you think that the weakness that you're seeing in this particular market segment is because of an overall slowdown in the rate of capacity additions for that or is there some technology shifts happening from perhaps IBS displays to OLED than maybe has a different mix?

It could be. I think, Sacha, however, I think what we're seeing is several quarters of enormous numbers of tools going in and business hasn't dropped to zero. We're going to go to something just about half of the current level and we're at the ready to begin shipping tools again.

There's been a lot of capacity put in place and I think where we see it's just a pause right now in what we think is growing. We also are quite aware that the tools that are used for these applications are being redesigned and I think it's one of those things where, similar to the discontinuity in LED, likely there is a different type of higher capacity tool on the way that we'll be asked to serve.

Okay. And switching gears to semis, how much do you think 450 millimeter could represent in 2012 for you, given that you are engaged with 5 or more customers at this point? Is that getting to double-digit type revenue levels? A percent of revenues in 2012? Or is it still --?

No, it would be a few million dollars, probably, for the whole year.

Okay, and lastly on the product business, if I sort of think that your Life Sciences bookings were double digits in the September quarter, or thereabouts, and assuming that customer operations is 1 to 1, book-to-bill is obviously very low in the product business. And, if I look at the commentary from your OEM customers that bookings are up 20% to 35% on average, it gets to be a high percentage, but in terms of the actual levels of billing, it's not necessarily a much higher level.

Looking at the type of activity that you are seeing right now in the December quarter for the new orders and perhaps the pipeline into next year, are you sort of thinking about the shipment pipeline as it's developing relative to the levels that you were seeing earlier in this year?

Well, I think you'll recollect the third quarter had actually a very strong book-to-bill for our core business, so, I think part of it was that we had strong bookings ahead in the third quarter that are been going through the pipeline in the fourth quarter. So, that's one reason why, even though that book-to-bill was very low, it doesn't necessarily have implications into the first quarter.

In terms of our profile for our fiscal 2012, it's clearly a view that this is going to be a backend-loaded year. Backend-loaded both in terms of operational improvement on margins, and backend- loaded on revenues for our BPS segment, as well as for our Brooks Life Science Systems segment. So, the profile will be for a slower start to the fiscal year, but we still think that the fiscal year has a very significant opportunity to it.

Okay, thank you.

Patrick Ho. Please proceed.

Thank you very much. I know it's early in the integration process in your Life Sciences business, but in terms of both Nexus and RTS, can you give us any little bit of color in terms of the leverage you may be able to get, in terms of, I guess, the product portfolio and how much of the integration process may be necessary between those two entities within now the entire division?

Yes. So, Patrick, there is some product overlap, some product portfolio overlap, so, some pretty big-sized stores at a certain temperature range. But we found, is that in one of the organizations we have, for sample, a very strong software capability to be able to leverage across the entire portfolio.

In another, we have really superb design capability and how we spend the next two quarters pulling these two groups together, so we have basically a single, engineering organization, even though two now three locations, and when you include Chelmsford, there's a lot to be gained here.

But, we're finding that there is expertise that we can leverage, if you will, from different parts of the organization. More adjustment has to be made, and what we will do with some of the resources, when we combine the three entities, is work on next generation products, as well. Because, we have some unique skills and when we put some technologies from the Brooks Chelmsford team in with the industry expertise, we think that will give a very powerful next-generation product development engine for us.

Okay, that's very helpful. A second question on the Life Sciences business and maybe, Martin, I know you give a little bit of color in terms of where the expenses are going. Maybe, if you could go one step below, in terms of that division, how much of it would you characterize as kind of the infrastructure build out, trying to integrate versus say the customer penetration cost, because I'm assuming that, and you just mentioned that you had some new product introductions, how much of the costs and expenses are I guess going into those two different buckets, maybe on a percentage basis?

I don't know that I could at this time give you an accurate representation of it, other than to give you a kind of an overall sense of the picture, which is that with some new products here, new products that both RTS and Nexus were introducing, literally at the time of our acquisition, there are in those situations, always are a lot of field support costs associated with addressing those new product issues.

Those are largely reflected in a reduction in gross margins, rather than in the operating expenses. Clearly, the other thing that we have is that in those introductions, particularly when they are, for instance, in some of the areas of instruments rather than the full-blown stores, we have to have the right capabilities to sell that equipment and those are being developed as well. The majority of those costs around the new product introductions are probably more in COGS than they are in the selling expenses although there are some in selling expenses.

Okay, great. And I guess just in terms of like the infrastructure build out, I guess you know at a very high level how many quarters do you see in terms of, I guess not only just the integration costs, but I'm assuming you have to build out teams, you have to build out, and hire new people, how many quarters do you think that will--?

No. No.

Patrick, I think we have adequate personnel right now for the businesses.

Okay.

And so it's reconciliation of who does what job, because we do have some duplication. And, I think it's taken the best talents and putting them in the right spots right now.

Okay, great. Thanks a lot.

Ben Pang, please proceed.

Thanks for taking my question. On the Life Sciences business, what's the customer concentration like just in that area? And in terms of the number of customers, as well as the geographic region?

Hi, Ben. We have 170 systems installed and just under 100 customers. To give you an idea. When we do an assessment of how many bio storage potential customers there are, whether they do it by a manual freezers, or a nitrogen doer, we measure that in thousands of potential but we have just under 100 customers in our installed base. And most of the business is Europe and North America, a little bit of penetration in Japan, just beginning, but a majority of the market opportunity exists in North America and in Europe.

Okay, so when you were talking earlier about I guess the cycle for market share gains in this area, you kind of gave a timeframe like a year to a year and a half, is that right?

That's about right.

Okay. And, how do you go about approaching that because your customer base is so large? I mean, how do we think about the market share, such a different type of customer concentration as your other businesses?

So, Ben, this is going to sound a little bit familiar to you. When tools kind of get to be about $1 million and the sales cycle is about that long and you've got a global sales force, you know what that sales cycle looks like, so we have people who go respond to requests for quotations, who understand the technical details. We send product managers, understand the opportunity, and there's a lot of back-and-forth that takes place.

But we have a pretty significant global sales organization made up now of both Nexus and RTS personnel. And, Nexus actually, a year before we acquired them, had acquired a company called Remp, who was a leader in a very large storage area. So, we have a very experienced, very capable account team backed by skilled applications and product people who really know how to address the technical issues that the customer has.

Great. And then this is a follow-up for Martin. When you answered the question regarding the LED opportunity, I actually didn't quite understand the answer that you gave in terms of why you're seeing the slowdown right now, but why you think the underlying growth rate is much stronger? Can you repeat the answer again, please?

Well, the answer is, and maybe I was not addressing the question exactly head-on. I think the question, as I interpreted it was, what's the impact for decline in our LED revenues, and my response was oriented towards the fact that our issue has not been that LED revenues have declined, it's that they have not grown the way that we were projecting.

And, that, in fact, for the LED reactor shipments that are being made, more of those are on multiple cluster arrangements than we had previously projected. So, from that point of view, it was favorable. But that the overall market conditions around the number of reactors going into the market was not favorable.

Okay, so you are still seeing, I guess, the favorable condition, in terms of the cluster tool, essentially, right?

Yes and I think you'll have heard positive statements elsewhere around that.

Okay my last question is regarding the service, the 17% pie. Is that primarily weighted towards the semi front end, or is that pie similarly split up with the industrial, et cetera?

No. It is mostly, not exclusively, but about, order of magnitude around 90% of it, being semiconductor. The difference there is those sales are predominately to the fabs and foundries rather than to the OEMs, so it's a different customer base, and it has a different profile to it by virtue of it being repair service and spare parts. The spare parts are perhaps the more cyclical piece rather than the repair piece.

Thank you very much.

Thanks.

(Operator Instructions)

Edwin Mok. Please proceed.

Hi, thanks for taking a follow-up. Just a quick question. Last quarter you guys talked about potentially a consumable business within your Life Sciences Group. Now that you have integrated Nexus how do you view that? Do you see that as a growth driver potentially?

We do, Edwin. So the consumable business, right now between the consumables and service probably about -- gosh, we anticipate even next quarter it will probably be somewhere around 20% of the business.

I see. I see. So, you're already generating around 20% of your sales coming from that side?

Yes, there are times when it's higher. But right now, the consumable business is a pretty steady part of the Life Sciences business.

Interesting, one of the areas we are just going through is developing the product management to really exploit the consumables opportunity. And, that team is being put together within Brooks Life Science Systems, and so, it is now time for them to grow that business.

Okay, that's helpful. And then, on the cryogenic commentary that you guys talked about, I guess within the industry group, can I ask you just to clarify, did that business actually grow on the September quarter versus the June quarter, and if it did, how much does it grow? And you mentioned about a pause, right? Is the level of decline, is that back to where you saw that business a year ago? Last quarter? How do we kind of think about that?

Actually --

Chillers?

Yes.

About 6 quarters ago.

Yes.

I see. But did the chiller business grow sequentially in the September quarter?

Yes, it grew very nicely in the September quarter.

It did again, yes.

I see, great. I just wanted to clarify that. Thanks.

All right.

And at this time there are no further questions in queue.

Well, thank you everyone. We appreciate your interest and participation today and we look forward to speaking with you on next quarter's call.

And, ladies and gentlemen this concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.