Azenta Inc (AZTA) 2012 Q2 法說會逐字稿

Good day, and welcome to the Brooks Automation earnings conference. 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, Angela, and good afternoon, everybody. I'd like to welcome each of you to the second-quarter financial results conference call of Brooks Automation for the fiscal 2012 year. We're hosting here from San Diego, the heart of our Life Science Systems business. We'll be covering the results of the second quarter that ended on March 31, and providing an outlook into the third fiscal quarter, which will end on June 30, 2012.

Our press release was issued after the close of the markets today, and is available at the Investor Relations page of our website, www.brooks.com, as are the illustrative PowerPoint slides to be used during our prepared comments during today's call.

I'd like to remind everybody that during the course of the call, we'll be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that could cause actual results or other events to differ from those identified in such forward-looking statements. I'd refer you to the section of our earnings release titled Safe Harbor statement; the Safe Harbor slide in the aforementioned PowerPoint presentation on our website; and the Company's various filings with the SEC, including the Form 10-Q just filed for the first quarter ending March 31 -- second quarter ending March 31, 2012.

We make no obligation to update these statements should future financial data over events occur that differ from the forward-looking statements presented today. I would like to note we also make reference to a number of non-GAAP financial measures, which are used to, in addition to, and in conjunction with, results presented in accordance with GAAP.

Management believes these non-GAAP measures provide an additional way of viewing aspects of our operations and performance, and when considered with the GAAP financial results and the reconciliations of GAAP measures, provide a more complete understanding of the Brooks business. Non-GAAP measures should not be relied upon to the exclusion of GAAP measures.

With me today is Brook's President and Chief Executive Officer, Steve Schwartz. After I've outlined some of the significant events of the quarter, Steve will elaborate, with remarks around the business environment and our current initiatives. I'll then provide an overview of the second-quarter financial results and a summary of our financial outlook for the quarter ended June 30, which is our third quarter of fiscal 2012. We'll then take your questions.

During our prepared remarks, I will from time to time make reference to the slides available to everybody on the Investor Relations page of our website. On slide number 3, I summarize the significant events of the March quarter, the second quarter.

The quarter was highlighted by substantial growth in semiconductor products and Life Science Systems, resulting in revenues of $139.3 million. Sequential growth of 15.9%; this growth provided for sequential gross margin recovery.

Meanwhile, we made investments for the future, with a $3 million linear intellectual property acquisition from Intevac. Given that this in process of research and development, we [capped] appropriate accounting treatment was to write off the bulk of the acquisition price on acquisitions.

We have removed this charge from our non-GAAP adjusted earnings of $0.20 for the quarter. There's quite a lot go going on in our SG&A spend, with higher costs for a full launch of the full Brooks Life Science Systems product portfolio; and branding at trade shows; the annual Directors' stock grant; and more than offsetting these temporary increases was a $3.2 million recovery of previously expensed legal costs associated with our past stock litigation matters. We have not attempted to adjust for any of those items in the adjusted earnings.

Finally, our top tax provisions continue to bounce around. This quarter we had a net benefit of $700,000.

With that, let me introduce Steve Schwartz.

Thank you, Martin, and hello everyone. I'm pleased to be able to speak with you today about our results for Q2, and to report on the progress of our strategic growth initiatives. We had another strong quarter, moving along our aggressive growth path. And I'll take a moment to give you some highlights from Q2 and an update on some of the longer-term initiatives that we've been working on.

In general, we made improvements across all areas of our business. We achieved revenue of $139 million, which was at the high end of our expectations; improved gross margin; and boosted adjusted earnings per diluted share to $0.20. We generated over $20 million in adjusted EBITDA, and ended the quarter with more than $200 million cash and no debt.

As we reported in our press release, we had a strong growth quarter. The semiconductor business improved significantly from the December quarter, and we are investing in and strengthening our position in both front-end and back-end segments of this market. We also drove continued growth in our Life Science Systems business. And we remain positive about the significant growth potential that exists for us as we apply our expertise in this new and exciting area.

Overall, our bookings were up 20% to $155 million, compared to the December quarter. And it was boosted by $21.2 million to bookings for our Life Science Systems business. These are positive indicators that we're continuing to enhance our market position. I do want to note that although the business is healthier than it was in the December quarter, and our outlook remains positive, we do not have much visibility beyond the June quarter. In any case, we'll use this very to continue to advance our strategic and operational initiatives for growth and operating performance.

I'll now give some color as to the progress on our strategic initiatives that we've been driving since the beginning of fiscal year 2011. First, to gain market share in our existing businesses, which we define as front-end semiconductor and adjacent spaces like (technical difficulty) LED, MEMs, PV, active display, and wafer level packaging. Second, to expand into new high-growth markets, the first of which we've now clearly defined as Life Science Systems. And third, to drive gross margin improvement across all of our businesses.

I'll report on progress in each of these areas, and give you some additional information about next steps for Brooks. We continue to be rewarded by our significant investments in our core technology business, as we win approximately two out of every three opportunities that we go after. In the quarter, we captured a number 17 design wins with OEMs for our BPS products, bringing our first-half total to 40 design wins, which is almost exactly on pace with the 79 wins we recorded in fiscal year 2011.

In terms of makeup of the 17 design wins -- nine were for semi front-end, and eight were for adjacent market applications, and we are in business from three new customers. We had eight robot wins; five for vacuum robots and three for atmospheric robots. We also had three new systems wins for back-end applications. We also continued our advance into 450-millimeter space, where we won an additional three 450-millimeter platforms, bringing our total to seven active 450-millimeter programs.

As a means to fulfill our long-term growth initiatives, we plan to continue to invest in RD&E at our current levels, as we believe this gives us adequate resources to capture the most meaningful business opportunities that come up. And we think that around these levels of spending, we are tapping into the most significant opportunities.

We'll continue our aggressive pursuit of market share in both the semi front-end and adjacent markets. And we're especially enthusiastic about the opportunity that comes with changes in the back-end, including wafer level packaging, because it's significant; and we are in a good position to expand our market share for BPS products.

It's now one year since we made our first move into the Life Science Systems business, when we announced to you our acquisition of RTS Life Sciences at the beginning of April 2011. Since then, we've been busy enhancing our position in automated cold sample management. In July, we acquired Nexus Biosystems. And this put us on a path with critical mass. It's the largest player in this growing segment, with a run rate of approximately $48 million per year, and an installed base serving up approximately 100 customers worldwide.

The integration of these businesses continues to go well. We've aligned group around single product and technology roadmaps, and we are unified in our approach to the market. We still see opportunities to further improve our cost structure, but we're pleased with our progress to date.

In the March quarter, our Life Science Systems business achieved $21 million in bookings, exceeded $15 million in revenue, and achieved gross margins about 40%, and is now making a positive contribution to profitability. Each of these metrics are meaningful internal milestones that we have achieved ahead of our already aggressive performance targets for this business. Included in the $21 million of bookings, our orders we received for five storage systems from four customers; three systems are for the US; plus one each for new customers in Denmark and India.

As we move forward in Life Science Systems, we'll continue to invest in current and new products and technologies, as we have organic development plans for products that will allow us to expand the market for automated cold stores. We also continue to look for acquisition opportunities that are consistent with our roadmaps. We are in the earliest stages of our development of our presence in this rapidly growing segment, but we are pleased with our progress to date, and bullish about her future.

Our business opportunity pipeline continues to be strong. Because of the nature of this business, the order and revenue patterns will still be lumpy. But we're confident in our ability to captured new and next business. And we're pleased with the growth prospects afforded by this Life Science Systems business.

The third major thrust for us is profitability improvement, driven by gross margin improvement in particular. We are just beginning to see the benefits from some of our supply chain initiatives, as we improved gross margin by 110 basis points in the quarter. But we acknowledge that we have much more work to do to achieve our objectives. And we are actively driving programs that will get us there.

I'd like to make two final comments to further emphasize the importance of our Life Science Systems business. First, we're holding this call from San Diego, where we just concluded our quarterly Board meeting, providing the Board with first-hand exposure to our Life Science Systems business which is headquartered in nearby Poway. Second, we are pleased to be able to announce that Ellen (technical difficulty) Zane, a well-known healthcare industry executive, has joined the Brooks Board of Directors.

Throughout her distinguished career, Ellen has demonstrated vision and leadership in the field. And we are fortunate to have someone with her experience and track record of success on our Board, as we look to enhance our market-leading position in life sciences and automated cold sample management. I join the rest of the members of our Board of Directors in welcoming Ellen Zane to Brooks. And we look forward to her contributions to our success.

I'll now turn the call back over to Martin.

Thank you very much, Steve. If you turn to slide 4, you'll see that Brooks sequential revenues and operating profit before special charges recovered from the cyclical lows of the December quarter results. Semiconductor product revenues grew by 32%, and were 58% of the $139.3 million of revenues in the March quarter.

Life Science Systems revenues on a GAAP basis grew by 14%, and were 11% of our revenues in the quarter. Our Industrial Products revenues had a very late-quarter surge, and grew 21% sequentially, remaining at about 11% of our business. Elsewhere, we saw marked percentage declines in revenues into MEMs, LEDs, flat panel display and solar markets.

On a non-GAAP basis, gross profit margin increased to 35% in the second quarter, compared to 33.9% in the first quarter of fiscal 2012, and compared to 32% for the second quarter of fiscal 2011. The sequential improvement came from our Brooks Product Solutions and Brooks Life Science Systems segment, offsetting a decline in the Global Services segment. While we are encouraged by our increase in margins, they continue to be affected by less favorable revenue mix and adverse absorption of fixed overhead costs; and continued headwinds with rare earth metal surcharges and electronic component price increases.

The R&D expense increased in part from engineers taken on to support the new Celigo product line and induct the associated with new product and design and wins introductions in our technology business.

Meanwhile, reported SG&A expenses decreased by $2.4 million, but were relatively flat in underlying continuing spend levels. And you can see we achieved nice growth in our operating income.

Slide 5 lays out our revenue and operating income waterfall compared to the first -- of the second quarter compared to the first quarter. As you can see, we experienced nice growth in the Product Solutions and Life Science Systems segments. With strong earnings drop through, particularly from the higher-margin Life Science Systems business. The $8.6 million profit increase was slightly offset by a $0.5 million profit decrease in our Global Services business, with slow pump repair revenues in the quarter.

Slightly higher RED and lower SG&A completed the $11.9 million sequential improvement in operating profits before special charges.

On slide 6, you'll see that on a GAAP basis net income for the second quarter of fiscal 2012 was $9.5 million, or $0.14 per diluted share, which includes Life Science Systems' acquisition-related adjustments of $0.5 million, and the $3 million charge I spoke to earlier, from the write-off of the linear automation in process research and development.

Adjusted net income, excluding the special charges, was $13 million or $0.20 per diluted share. This compares to first quarter fiscal 2012 income net income of $3.8 million or $0.06 per diluted share, and $26.8 million or $0.41 per diluted share in the second quarter of fiscal 2011, at the peak of the last semiconductor equipment upturn.

Our joint venture operations in Japan also suffered a significant downturn, and contributed $1 million less to earnings in the quarter, which offset the favorable impact of income taxes in the quarter.

In slide 7, you'll see the consistency of our past profits generation, as we chart adjusted EBITDA against revenues since our fiscal 2009 restructuring. Adjusted EBITDA for the second quarter of fiscal 2012 was $20.6 million, which grew from $10.8 million in the first quarter of fiscal 2012. Our adjusted EBITDA margin to sales rose 14.8%, compared to 9% for the first quarter of fiscal 2012. A reconciliation of these amounts to GAAP amount is included as an attachment to our press release.

On slide 8, you can see that the EBITDA growth cash flow from operations of $16.6 million, which was net of the $3 million linear IP acquisition, which is treated under GAAP as an operating cash flow utilization. We also had a $1.8 million increase in working capital, arising from growth in operating activities. Consistent with our plans, we spent $2.3 million on capital expenditures. Our capital expenditure plans are for an approximate $11 million spend in the fiscal year.

We utilized $5.2 million on cash returns to shareholders through our dividend program, which currently produces a 3% yield to stockholders. Overall cash and marketable securities, excluding restricted cash, grew by $9.8 million to $204.3 million.

Slide 9 notes this cash and marketable securities balance, which represents $3.10 per share with no debt in the business; includes $200 million that is readily liquid and available to use. The accounts receivable performance improved, with receivables expressed as day sales outstanding, shrinking from 55 days to 52 days.

Inventory balances edged up by $2.5 million, but turns improved modestly to 3.4 times. Overall, net working capital was $103 million. And asset velocity, net working capital as a percent of annualized quarter revenues of 18.3%, improving from over 21% in the December quarter.

On slides 10 and 11 and 12, we break out sequential revenue performance and operating performance for our three continuing businesses. When we look at the Brooks Life Science Systems segment, we are doing so without acquisition for our value adjustments that are set out in the appendix to the slide deck. In the March quarter, this business generated $15.3 million of revenue, a 15% quarter-over-quarter increase sequentially; obviously, well ahead of our 20% annual growth target.

This growth is, in part, a function of the timing of activities on larger automated sample store projects. So we might bounce around on the top line from quarter to quarter, but the momentum is consistent with our goals.

Gross margin was above 40%, and the segment has had a profitable quarter on an operating basis as we move through the process of integration and building product to market position for the future. This brought the Life Science Systems business to an underlying $61 million revenue run rate. And as I said, slightly ahead of plan at this point.

Revenues for the Brooks Product Solutions segment were $103.5 million in the second quarter of fiscal 2012, compared to $85.3 million in the first quarter of fiscal 2012, an increase of 21.3% with a semi front-end recovery and late-quarter industrial market improvement. Our gross margin of 34.7% in this segment, while improving sequentially, continued to be adversely affected by revenue mix, certain cost headwinds, and lower overhead absorption.

The mix profile and robust challenges on the pricing side will continue to challenge us in the back half of the year, although operations initiatives may show a continued sequential improvement.

Our Brooks Product Solutions operating profit was $7.6 million, improving sequentially from $1.1 million. The revenues for the Brooks Global Services segment decreased 3.9% on a sequential basis to $21.2 million, with a pullback in the pump repair business; with lower spend associated with certain low fab utilization. Our gross profit was lower (technical difficulty) revenue decline, and building (technical difficulty) from building capabilities for anticipated revenue growth.

Turning to guidance on slide 13; as Steve mentioned, order booking in the second quarter of fiscal 2012 grew 20.7% (Sic - See Press Release) to $155.3 million compared to order bookings of $128.6 million in the first quarter of fiscal 2012. This includes $21.2 million of Life Science Systems bookings, and $134.1 million of technology business bookings. Book-to-bill was [145 for the Life Science Systems business and 106] for the technology business.

With these bookings as a backdrop, we project the sequential revenue increase for the third quarter to be flat to up 5% for the third quarter, with revenues in the range of $140 million to $147 million. We anticipate the proportion of revenues from front-end semiconductor equipment to continue to modestly increase, with very soft performance in the markets adjacent to semiconductor and approximately flat performance from the Life Science Systems business.

The headwinds to driving earnings growth (technical difficulty) income taxes; higher SG&A spending, with the net impact of the both items discussed earlier on the call; and the fact that our gross margin improvement keep being held back from our prior targets. This is a function of longer approval cycles than expected from some of our OEMs for cutting in lower-cost product components; continuing product mix favoring some of the lower margin product lines in our portfolio; and some cost challenges impacting our cryopump business.

With these factors in mind, we expect adjusted EPS, excluding special charges, to be in the range of $0.15 to $0.20 per diluted share. With the impact of restructuring charges associated with improving operating expense performance, we expect GAAP earnings to be between $0.13 and $0.18 per diluted share.

On slide 14, you'll see the third-quarter revenue guidance added to the historic trends of the business in its current configuration, and you should note us moving to new highs. Beyond the third quarter, we would expect to see, again, modest topline growth; and expect sequential gross margin improvement that provides some earnings leverage. We also plan on a fairly significant one-time charge in the fourth quarter from the termination of our frozen US defined benefit plan. This termination will involve a $6 million to $7 million use of cash.

Lastly, we announced that our Board of Directors had declared a dividend of $0.08 per share, payable on June 8, 2012, to shareholders of record as of June 29, 2012. As noted previously, this currently equates to a yield in excess of 3%.

With that, I'll now turn over for questions, Angela.

(Operator Instructions). Edwin Mok.

Congrats for the good quarter. My first question is on the guidance. If we listened to some of your peers in the semiconductor subsystem group talk about the business, they all talk about the coming quarter being flat to down. Why are you guys expecting your semiconductor business to grow in the coming quarter?

Yes, hi Edwin, we hope some of that is from market share gain. And what we talk about being up is modestly up. But we're getting a pretty good look at quarter pattern patterns; and although it's not going to be up like the quarter we just saw, we do feel that we are starting to get some benefit from the market share gains that we've had.

Great, that was very helpful. And then on the 450 that you talk about, the seven active programs right now, are you shipping products on those and recognizing revenue for those products?

We are, at modest levels, Edwin. We're shipping one and two a quarter right now but when we say seven active, it means we've had orders from seven different -- for seven different units of production.

Great. And then moving on to the Life Science area, you talk about very strong bookings in last quarter. But I think you guys guided for somewhat flattish revenue. Is it just due to timing of revenue? And how do we think about those bookings? Is that usually takes a longer time for the bookings to turn into revenue?

Edwin, in that circumstance, there was a major booking for a very large system that was taken in the quarter that won't deliver until our fiscal 2013. And that kind of lumpiness of timing between a booking being taken and delivery being -- and installation being required by a customer, is going to be a little inconsistent in the Life Science Systems business, particularly in circumstances of the largest orders, where they've got to do a major building preparation.

Secondly, the other thing which -- we are learning a little bit about this business as we go along here as well -- is that you'll tend to see a little bit of peaking of bookings in the first calendar quarter of the year on our services business, because so many of the service contracts actually run on a calendar year basis.

I see. That was helpful. And then I have two more questions; the first is related to margins. I think you guys are -- well done on bringing the Life Science to positive operating margins, but how do you think of the margins profile for that business, longer-term? I think you, in the call you -- on the prepared remarks, you talk little bit about the margins progressing, but maybe not to what you guys are expecting. Longer-term do you think you can still achieve this 40% gross margins that you guys talked about previously?

I think -- let me take and separate -- the concern with margins was less around Life Science Systems, frankly, than it was around the other parts of our business; in terms of reaching overall, corporate-wide 40% gross margin target, and the fact that my that might be being deferred some.

On the Life Science Systems business, I think we're moving nicely forward on both operate -- gross and operating margins. We can take incremental steps in the near term. And in the longer term, this has the potential to be at operating margins of equivalent to our other parts of our business.

Great, great. I have one more question, actually. I know that you guys talk about -- you have two systems, one's in Denmark; and I think you mentioned one's in India, right? As the Life Science business grow and probably some of the growth will come out from outside of the US, do you see the risk that you might have to expand your operation, just to target those opportunities there? And that's all I have, thanks.

Right, thank you. In terms of that expansion, we see the ability to do that at Brooks, in terms of picking backing on the fact that we do already have a global infrastructure. And as an advantage and a relatively cost-effective way that Brooks can serve on a global basis these customers which, frankly, the competitors to our business will find very challenging.

Okay, thanks.

Ben Pang.

First, on the guidance for Q3, in terms of the SG&A expense, what is that related to?

The SG&A is when you take out the three elements that -- which in the second quarter, were somewhat oddball items -- being which were the expenses associated with the launch of Brooks Life Science Systems and the Brooks Life Science Systems branding; the annual Directors stock grant, which occurs one time a year and invests immediately; which, between them, were about $1 million of incremental expense. And then we had the benefit from the recovery from insurance companies of open items related to legal matters expended in the past that was favorable $3.2 million.

He's going back to the normalized operating expense levels that we've had before. I'd also point you, Ben, to the fact that we are looking very closely at our operating expense levels, and may well be taking actions, as indicated by the fact that we are planning for some restructuring charges in the quarter.

Okay, and then on the gross margin for the Brooks -- your BPS situation. Is that just -- what causes the pump volume I guess, pump repair volume to go down? Is that a market share issue, or -- ?

We don't believe it to be a market share issue. It's the fact that those fabs and foundries that were not close to capacity would, in these circumstances, typically be deferring maintenance type of activities. In other words, repair activities that were discretionary, and if you're not at capacity and you have a pump failure, you might well just swap around a pump from an idle machine as well. It's a across a broad base, so there's nothing to us that indicates a specific loss of share.

So as the utilization rate increases, that should pick back up to a normalized level, I guess?

Yes, it should.

Okay. And then, in the automation part of the gross margin, you mentioned product mix as well as, I think, pricing.

Yes.

Can you give a little bit more color around what you're seeing, in terms of pricing issue?

I think you'll clearly see, as you have a concentration of both the cap spenders of capital expenditure, and a concentration of the OEMs that are providing the solutions on that spend. There is increased pressure all the way down the supply chain, from the end customer down.

And is it -- are you seeing the same type of pricing pressure, even for the vacuum -- high vacuum products?

Yes, I would say it's across all product lines.

Okay, okay. And then, two more questions from me. One, in terms of the design wins for the back-end, can you provide a comparison relative to the 70 design wins for fiscal year 2011, in terms of how many were back end wins in fiscal 2011 and -- is that run rate really increasing for your wafer level packaging, et cetera?

Yes, Ben. Hi, it's Steve. We don't have it very specifically broken out. We can do that. But we don't have it here. But if we look at front-end semi versus adjacent, the 79 wins in 2011 actually -- and continuing with the 40 additional wins, it's almost 50-50, in terms of what's front-end and what's adjacent.

Okay.

And we have three back-end wins. For example, this -- in Q2. But without question, the wafer level activity is having an impact.

Okay, and the last question from me is, when you talk about the other parts of that business -- MEMs, LED, solar, for example -- do you have any visibility beyond the June quarter on those segments? Do you think they are bottomed out? What's your feel there?

They have to be close to bottomed out, Ben. We just don't have an idea of when they're going to pick up.

Okay. All right, fair enough. Thank you very much.

Terence Whalen.

Hi, this is Wenge Yang for Terence. Couple of questions -- first of all, in your discussion with your semiconductor customers, what is their view or their forecast in terms of how the calendar's second half looks like?

I think, without question, everybody's cautious. We're getting -- we get mixed signals about even the June quarter, frankly. Some say up slightly, some say down slightly. And when we all talk about what the back half looks like, I don't think anybody has any certainty to offer.

Is there any change in terms of in the last couple of weeks, in terms of the outlook?

I wouldn't say there is. For instance, I think the TSMC outlook is still not passed down to the OEM level at this stage for there to be any degree of clarity on as to where that increased spend that they talked about is actually going to occur, either in terms of what they're going to spend on, nor the timing of that spend.

That's very helpful. Regarding the inventory level at your semi customers, is there any change in terms of inventory levels? We hear some pockets of supply constraints. Maybe we would assume there was obviously an area, inspection area. But in terms of your customers, is there any inventory issues or supply-chain constraints, as you have seen?

We don't know right now that customers who need product need it right now. And so when we are timely, that's very important to them. So we would guess -- we would infer from that, that the inventory levels are likely low. But we don't have good visibility into it. Because when their order patterns go up, ours go up almost instantaneously, one would infer that there's not a lot of inventory -- of our product, anyway, in the pipeline.

Great. Just switch gear to the Life Science -- I try to look at more of a longer-term view on the business. Let's assume that you don't acquire any new companies, and just based on the market you're serving right now, I model $60 million in revenues in this fiscal year. And you mentioned in an [end of state] it should grow 20% plus annually. So is that a safe assumption, in terms of the revenue trajectory for the Life Science; $60 million run rate for this year and 20% growth?

Yes, that's an expectation that's good for the market, if we -- and if we didn't get any market share. We're aggressively investing in the product portfolio. But you are correct, we anticipate about a 20% market share growth, but we have -- sorry, a 20% growth in the market -- but we have high expectations for our capability to compete.

Okay, so if I'm adding the market shares side of the upside, it could be outgrowing this 20% average for the whole market, right?

Yes, that's fair.

Okay. And in terms of the lumpiness of the business; for example, in this quarter you booked much more than you could recognize in the revenues. Should we assume that the lumpiness will happen every quarter? Or is this more of a seasonal pattern?

I would say this is something that can happen fairly frequently, depending upon the pace and timing of particular large projects, and where the spend occurs. I wouldn't say that it's a seasonal pattern, and that we are looking at this being a strong quarter. In fact, historically, this March quarter would not have been one of the stronger quarters. From the businesses before we owned them. So this was a very strong performance.

Yes, and just to clarify -- $155 million is not more than we could ship. The bookings come now; the expectations for delivery from the customer's standpoint are later.

I understand, understand. Just two quick questions on the finance side. One is regarding the gross margin, Martin -- so, should we assume the revenue is the biggest lever to improve your gross margin? Or is there any other things that you could do before your revenue reached too high a level?

I think we've talked before about the fact that we have an ongoing margin improvement program, an operations improvement program, a large part driven around supply-chain improvement. The timing of that really showing in our results and giving rise to a margin improvement, is, in part, a function of the timing of our customers approving the cuts in of those. And that's a very rigorous process in the copy exact world of semiconductor; and one in which we are confident we'll get through and have some meaningful margin improvement when those changes are approved.

Okay, okay. The last one is on the tax rate we should use to model Q3.

For Q3, within that guidance is a 3% to 4% tax rate for that quarter.

Great, thanks.

Satya Kumar.

Hi, this is Farhan asking a question on behalf of Satya. I had a question in regard to your domestic mix profile you mentioned on your semi-side that impacted the gross margins of this quarter. I just wanted to probe it a little bit more. Was it a customer mix issue or a product mix issue? If you could just talk about it. And also longer-term the factors that you mentioned for the margins in the semi business in terms of customers and validation and margin improvement at your customer side. Those are longer-term issues. How should we think about margins within this area? Is there expectation of margin improvement with in this area, in your semi business? And going forward as well?

There is, to take the last question first. There is an expectation of sequential margin improvement for both the third quarter and the fourth quarter, driven off the initiatives I was just talking about in response to the previous question. So, those, we do believe will generate further momentum. We think there are equally other initiatives that are being looked at in terms of our strategic presence and our service to our customers that will give rise to further improvements in the longer-term.

In reference to the mix; the mix is predominantly which particular kind of products to which particular OEMs. Not something I can go into in much detail, but it is very specific to certain product lines that are going to certain customers.

Okay and thanks for answering that. Getting back to the merger between Novellus and Lam, do you see that that could impact your margins as well? I mean, both of them are customers of yours. And in terms of what you're seeing from [demand free], could you just comment on what you are seeing at demand free, and if you were to think about similar dynamics there (multiple speakers)?

There clearly ends up being some interesting dialogue as they compare prices as the merged businesses go together. I don't think we find tremendous amount of discrepancies there that we have to adjust to, but there are some. And so we don't see that as being a major impact there just by virtue of the mergers.

Got you. The other question I had was in terms of your adjacent market. In your December quarter, you had mentioned roughly about one-third or a little more than that of your product revenue was from adjacent spaces. How's that mix looking now, when you look in your Product Solution business?

Well, as I said, when you start taking 58% of the business with semiconductor product in the quarter; 11% was industrial; 11% was Life Sciences; and Service was 15%, you can see that, in fact, the adjacent markets are at really quite nominal levels and, cumulatively, well under 10%.

That's all I have. Thank you.

Richard Kandel.

Thank you for taking my question. It's related to the Life Sciences business. We noticed earlier integrating Life Signs with acquisitions. But can you give us an update on the steps you've taken in this quarter to integrate the manufacturing and supply chain strategies? Have you been able to leverage the course (technical difficulty) manufacturing capabilities in that process? And if so, are there any potential synergistic opportunities you could share with us going forward into the second half?

There are definitely opportunities. I think a lot of what we're doing in the last quarter was around marketing, sales, branding, and profile in preference for the customer. And so there was emphasis in the most recent quarters than there were on operations. I think the next area of focus for us will be in the operating expense area. And we see further benefits that can be brought to the bottom line, and we'll be working on those.

There are relatively modest impacts in manufacturing that come just from rationalization. But we are already introducing better practices and better supply chain management that you've already seen have an impact on that gross margin improving over 40%. And that and volume leverage -- we've talked about this business having the potential to be mid-40s gross margins, and we feel very confident that that -- we're on that pathway there and we'll get there in relatively short order.

Okay. Great, thank you. And as far as it relates to Celigo, your most recent acquisition in Life Sciences, how have you been able to leverage your previous acquisition in Life Sciences to more quickly integrate Celigo? And also, does that acquisition potentially drive incremental revenues for achieving a sustainable profitability breakeven in Life Sciences?

I think there can be significantly more contribution from Celigo that we see today. And as you do that, you'll see even more incremental leveraged benefit to the bottom line from the revenue increases in the Life Sciences business. And so that business is integrated completely. It's being manufactured just down the road here in Poway, California. We have the salesforce out there, very actively, with an interested customer base. And so we believe that that can be a good contributor into the future.

Okay, great. As I noticed in the last quarter, you had revenue about $13.3 million in the Life Sciences and about $300,000 loss; and in this quarter $15.3 million, and obviously a breakeven. Could you potentially give us a better understanding of -- is there a specific revenue run rate in which an operating breakeven can be achieved going forward?

I think, from what we're talking about in terms of the initiatives that we have underway at Brooks Life Science Systems, we're looking to continually decrease the breakeven point of the business. So I think it'll be ever-decreasing breakeven point below the roughly $60 million mark that it was in the current quarter.

Okay, great. And I'm sorry to head home on the margin questions, but I've noticed that -- or I saw from the last couple of quarters, you said that around $150 million of revenue run rate -- (technical difficulty) -- possible to achieve 40% gross margins. Given the product mix that's going to the second half more favorably focused on semis, is that something you think is potentially possible, to hit a 40% gross margin on $150 million revenue?

I think that is probably doubtful with a product mix that we're looking at. One or two of the cost headwinds I made reference to earlier in my prepared remarks -- that we see that in the current fiscal year.

Okay, great. Thank you very much. That's all I had.

(Operator Instructions) Jairam Nathan.

Just to better understand the gross margin impact, is there a way you can give us a walk on a year-over-year basis? I noticed that excluding contract manufacturing, probably, you had a 38% gross margin rate. And can you just give us -- I don't want exact numbers, but just a walk on what was the volume impact? What was the mix impact? And what was the cost impact?

Well if you're talking about the run rate the business was running about 37% last year, versus the 35% that we're talking about currently. A big part is absorption. The mix piece -- if you were to take roughly it in half, thirds; you would -- could roughly attribute a third of them to each of those three particular categories.

Third to -- to each of them; the absorption, mix and cost?

Yes.

Okay. On the active display, you said that has been ratcheting down because of an overcapacity. How is that business doing and what is the outlook, please?

Sorry I missed that, Jairam. Polycold?

Yes, the active display.

Yes, the Polycold business actually started to see a pickup very late in the quarter. So we are starting to see that recover. We would expect to see that business also grow in the June quarter. We do not expect it to be running at the peak levels that we saw towards the back half of last year, though.

Okay. And my last question is on the tax rate for the full year.

I think what you should expect, as I previously said, a 3% to 4% tax rate in the third quarter, and a small tax benefit in the fourth quarter.

Great, thank you.

We have no more questions at this moment. (Operator Instructions).

Okay, well, we thank everyone for your interest and participation on the call today. And we very much look forward to speaking with you at the end of our third fiscal quarter. Thanks very much.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining, and have a good day.