Azenta Inc (AZTA) 2013 Q4 法說會逐字稿

Welcome to the Brooks Automation fiscal 2013 fourth quarter and year-end earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded today, Thursday, November 14, 2013. I would now like to turn the conference over to Mr. Lindon Robertson, Executive Vice President and Chief Financial Officer at Brooks Automation. Please go ahead.

Thank you, Kamika, and good morning everyone. I would like to welcome each of you to the fourth quarter and full-year financial results conference call for Brooks fiscal 2013 year. We'll be covering the results of the fourth quarter and the year that ended on September 30 and we'll provide an outlook into the first fiscal quarter ending December 31, 2013. The press release was issued earlier this morning and is available at the Investor Relations page of our website, www.brooks.com, as are the illustrative PowerPoint slides that will be used during the prepared comments during today's call.

I would like to remind everybody that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor statement, the Safe Harbor slide in the aforementioned PowerPoint presentation on our website and the Company's various filings with the SEC. We make no obligations to update these statements should future financial data or events occur that differ from forward-looking statements presented today.

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

On the call with me today is Brooks' Chief Executive Officer, Steve Schwartz. We will open with his remarks on the business environment and our highlights and then we will provide an overview of the fourth quarter and full-year financial results and a summary of our financial outlook for the quarter ending December 31, which is our first quarter of the fiscal 2014. We will then take your questions. During the prepared remarks, we will from time to time make reference to the slides available to everybody on the Investor Relations page of the Brooks' website. For now and with that, I will turn the call over to Steve Schwartz.

Thank you, Lindon. Good morning everyone and thank you for joining our call. We are pleased to have the opportunity to report the results of the fourth quarter of our fiscal year. We had a very good quarter, operationally, strategically, and financially.

To give you just a few highlights, we increased adjusted gross margin 240 basis points quarter over quarter and almost 400 basis points from the first quarter of 2013. We generated approximately $25 million in cash from operations in the quarter, which is a testament to the strong operating model that we've created at Brooks. We continued to make significant market gains through design wins in all of our businesses. We successfully completed the acquisition of our third automated cold storage company, which is already off to a strong start. And the momentum we've generated gives us confidence in our ability to continue to make significant improvements throughout 2014.

I'll spend time in my commentary to give additional color to these highlights and speak to how our progress in fiscal 2013 has set us up very favorably for a strong 2014. But before I highlight any accomplishments for the quarter, I'd like to comment on the current market environment. In particular, I'd like to shed some light on our revenue outlook for December in the context of an upward movement in semi that's offset by some slowness in other adjacent markets. Just as many of the companies who also serve the semiconductor capital equipment space have already reported, we see semiconductor front end business picking up for the December quarter and we can detect strong momentum continuing into March. While our revenue guidance for the December quarter reflects an increase that is on the lower end compared to guidance provided by other critical subsystem suppliers, our semiconductor front end revenue forecast is very much in line with others serving this market.

I'll break down our revenue projections as follows. In the semi front end portion of our business, we anticipate an increase in revenue from September to December that's consistent with the 10% to 20% increase that's been reported by others. Specifically, we see the strongest growth from our two largest OEMs and our three top Korean OEMs, as the demand from Samsung is having a big impact on all of us suppliers. On the downside, we see our backend business declining by double-digit percentages for the second consecutive quarter, which is reflective of the near-term softness we see in that market and consistent with the guidance given by equipment companies that serve the backend. However, our share position remains strong and we continue to win new designs for advanced packaging and we are positive about a pick-up in 2014.

The biggest decline in our BPS business for the December quarter comes from the part of our business that serves the consumer electronics space. Our Polycold products are cryochillers that are used predominantly in the creation of vacuum for the manufacture of displays for tablets and smartphones. Consistent with the seasonal cyclicality that we've observed over the last two years, this year we forecasted almost identical drop of more than 40% from September to December. So in the aggregate, this quarter, the strong growth in semi front end is being largely offset by a decrease in the Polycold and backend businesses due to seasonality and some softness in those markets.

I will now give some of the highlights from the business units. As I mentioned earlier, we have good reason to be positive about the growth in the semi market as well as our ability to capture the important new opportunities that are coming. In the September quarter, we continued to register strong design wins in our BPS core business segment. We recorded another 15 OEM design wins, of which 5 were for front end semi applications and 10 were for adjacent market applications, including advanced backend packaging, MEMS and LED. The regional breakdown of our wins was eight in Europe, four in Asia and three in North America. Notable among these were five system wins and four new MagnaTran robot wins. Two of the new wins were for 450-millimeter products.

A large OEM also designed us into two new semi front end platforms with our MagnaTran vacuum robot. When this OEM changed two of their product platforms, we were selected to replace their internally developed robot which is a testament to their trust in us as a supplier of new products and technologies for next-generation design nodes. This is a trend we're seeing more of as even the largest OEMs with the greatest scale are reconsidering their need to make their own automation products when companies like Brooks are extremely capable and committed to investment in technology and timely coordination with their product roadmaps.

On the end-user side of the business, we also had two very significant wins that were led by our Fremont team that came to us via our acquisition of Crossing Automation earlier this year. At the beginning of the September quarter, we were approached by a major logic company with a challenge to make some engineering modifications to our Spartan Sorter design that would enable the customer to gain significant productivity improvements in their next-generation fab. With a very short timeline and a difficult specification, a focused team of engineers were able to complete the new design and build the first unit, which is currently installed in the customer factory in Asia. And is in the first -- is in the process of undergoing strenuous burn-in testing. This opportunity is particularly important as it gives us a chance to displace an entrenched competitor, who was not able to meet the new performance demands and that puts us in a position to capture what should be a demand for tens of units over each of the next few years.

In another case, we were engaged by a major advanced backend test and assembly factory to develop a special handling system that will be the foundation for their sorting operations. As a result of this work, our unique backend automation capability has already been adopted by some of the OEMs who also serve this customer. In general, our backend opportunity continues to grow and we have proven that we have the technical capability and flexibility to win these new opportunities as they arise.

We're particularly pleased to report that now one year since we acquired Crossing Automation, the integration activity has gone very well. We've already recognized all of the cost synergies that we had committed and we are well ahead of the revenue synergies that we've targeted for year two. Additionally, we now have a strong technical team in Silicon Valley in very close proximity to our largest customers, so our cycle time and speed to solution is dramatically reduced.

In our Life Science Systems business, we continue to gain traction and we had several significant achievements in the quarter. Revenue in the September quarter was $11.3 million, an increase of 28% over the June quarter. We had wins for upgrades of two of our stores at a major pharmaceutical company. We won a new Store at a research institute in Korea. This will be an important reference site in Asia as it's a government-funded system that puts us in strong position for subsequent government contracts. We shipped our first SampleStore II System to a customer in Germany and we closed on our acquisition of Matrical. We're particularly pleased with the addition of the Matrical team as we benefit from the tremendous experience of their commercial team as well as product portfolio that complements our existing offerings and gives us other new products that expand our reach into agricultural bio space.

On a previous call, I mentioned that this year we launched our new BioStore and SampleStore products which are the first Brooks-designed automated cold storage products. We are particularly pleased with the continued market acceptance of our new design as we've already won seven systems with this architecture. We have very strong momentum in the market for this system concept and it already represents more than half of the systems that we're booking.

The key opportunity that continues to drive us in this business is the ability to leverage our unique combination of automation and cryogenic technical expertise to develop and sell products that will enable a market that is just developing. By our estimates, which are supported by research from different companies who have analyzed this market, we believe the total market for cold sample storage will be approximately $500 million in 2013, with automated cold storage systems representing an opportunity of approximately $165 million. By 2018, we further estimate that the cold sample storage market will grow to around $1 billion and we believe that the automated sample storage systems will constitute approximately $400 million of that market.

We also believe that most of the market growth during this period will be for automated sample storage at minus 80 and minus 150 degrees C, temperatures where the automation challenges go up exponentially and represent a unique place for us to excel. As we examine our business pipeline, we're confident that our investment in new products is exactly the right strategy to enable us to continue to grow share from our already leading position and we have aligned our efforts to capture these automated ultra-low temperature opportunities.

In terms of guidance for Life Sciences in the December quarter, we anticipate that revenue will grow another 6% quarter on quarter to approximately $12 million. We currently have in excess of $30 million of backlog, which will increase again this quarter as we feel confident about the strength of our bookings pipeline. Overall, we are excited about the opportunity for our Life Sciences business in 2014, and we believe we are positioned for at least 20% annual growth in this business. We continue to evaluate opportunities to add adjacent capabilities in terms of consumables and devices that bring value to the storage and transport of cold samples. We are in a good spot, we have excellent traction and we are even more confident in our ability to succeed in this market.

Before I conclude my prepared remarks, I want to spend a moment to highlight the significant operational performance improvements we have achieved during the fiscal year. In addition to delivering solutions to our customers' technical problems with our products and technologies, we've been keenly focused on asset management, gross margin improvement and the efficiency of our operations to drive improved profitability and cash flow. Over the past 18 months, Mark Morelli and his team have put into place an operating system that provides us better control of all aspects of our business. I will highlight a few of these accomplishments that are the result of this focused operating discipline.

In the quarter, we generated $25 million of cash from operations. We increased adjusted gross margin by 240 basis points from Q3 to Q4, and that was up 380 basis points from Q1. These gains have come from focused programs that have reduced the cost of warranty, materials, and other supply chain costs. We have worked to selectively rationalize our product portfolio by selling our discontinuing product lines that have outlived their useful profitable lives. For the year, we reduced inventory by $15 million, excluding acquisitions. In addition, a key component of our business model is to continue to shed fixed costs by consolidating our space and getting out of facilities. We believe we have an operating model and a cadence that are working well and more importantly, our plans are on track to deliver steady sequential improvement through the coming year.

We have accomplished a great deal over the past year and we feel that we are now in a position to take advantage of all that we've done. In addition to revamping our product portfolio, we brought a significant amount of stability and control to our Life Sciences business and we're building a strong opportunity pipeline and managing it responsibly. We've continued to spend significantly on RD&E and by delivering solutions to our customers' demanding technical problems, we have been rewarded with more than 70 additional OEM design wins. Our RD&E spending level of more than 10% of revenue has been critical to putting us on a path to sustained growth in all of our markets.

In 2013, we recognized a significant milestone when 60% of our revenue came from products that were new or significantly upgraded during the last three years. When we combine this type of aggressive customer-centric product development with a sustained, sturdy operating model for gross margin expansion and asset management, it puts us in a very favorable position to capture all of the opportunity that 2014 will bring. That concludes my prepared remarks, but another first for me, I will now turn the call back over to our new CFO, Lindon Robertson.

Thank you, Steve. I'll refer you to the chart package on our -- available on our website. In reviewing the fourth quarter on slide number 3 of the charts, we show a healthy 240 basis points of adjusted gross margin improvement on flat revenue. This is the third sequential gross margin improvement in as many quarters. Roughly half of the margin increase in this quarter comes from the operational initiatives which will be sustainable going forward while the remainder benefited from our seasonal peak of license income and some favorable adjustments to cost reserves. The increase in R&D expense is directly related to product program investments in this period, a portion facilitating an accelerated design-in opportunity and a portion supporting the Life Sciences program to develop the automated storage solutions for minus 150-degree environments. The SG&A expense is at a more normal level this quarter while the increase primarily reflects the prior quarter's reversal of stock compensation accruals.

Turning to slide 4, we show the profit waterfall quarter to quarter. You can observe the softness in Brooks' Product Solutions revenue but also the impact of the strong gross margin contribution. The Brooks Product Solutions segment declined $3.4 million, driven by a 3% decline on sales into both the semiconductor market and the industrial market. However, with stronger gross margins, profits increased $1.3 million, reflecting improved cost and mix including the license income. We have seen steady margin expansion from these operational initiatives all year. Our Life Sciences business is benefiting from strong historical bookings and showing $2.5 million, or 28% growth. Life Sciences' operating profit is lower this quarter compared to the third quarter with less software content and increased R&D spending. In each of our segments, we experienced some increase of expense in the fourth quarter, driven by the prior quarter's reduction and the stock compensation accrual referenced previously. In other operating expenses on the page, we had an increase in spending for M&A initiatives.

Now our slide number 5 shows, GAAP net income for the fourth quarter of fiscal 2013 was $6 million, or $0.09 per diluted share. This includes $2.7 million of special charges, including a $2 million impairment of the intangible assets related to our Celigo Instruments product line. We also carried approximately $380,000 of restructuring and $350,000 from acquisition-related costs. Income taxes were a benefit to the quarter, partially driven by anticipated discrete items expiring and partially due to the mix of jurisdictional income. Our UCI joint venture produced strong profits as they sell into the adjacent markets including the OLED TV manufacturing space, and the non-GAAP net income was $8.8 million, or $0.13 per diluted share. Beginning with this quarter, our non-GAAP earnings statements now exclude amortization expense of intangibles along with special charges or gains. Reconciliations to GAAP earnings is available on our press release and at the back of this chart package.

Turning to slide number 6, we take you from adjusted EBITDA to a change in our cash balances. The $11 million working capital improvements were significant help in driving operating cash flow to $25 million for the quarter. We also generated $11 million from the sale of the building and acquired Matrical for $9 million in the quarter. We ended fiscal 2013 with cash, cash equivalents and marketable securities at $173.4 million, or $2.63 per diluted share, with no debt.

Turning to slide 7, we do feel very good in regards to our balance sheet as we enter fiscal 2014. Our business model continues to provide a very healthy platform from which we can continue to return dividends to shareholders and bring additional assets into the Brooks' portfolio.

Turning to slide number 8, the Brooks Product Solutions revenue performance and semiconductor revenue was down 3%, industrial revenue was also down 3%, and revenue into the adjacent markets declined 7%, reflecting the market conditions for the segment. Despite lower revenue, adjusted gross profit increased $2.8 million, with 4.7 points of margin expansion. As referenced earlier, approximately half of this margin increase is driven by sustainable operational improvements. The remainder is driven by additional license income and favorable adjustments to cost reserves in the quarter.

On slide number 9, you'll see that Life Science Systems business for the fourth quarter of fiscal year 2013 grew to $11.3 million of revenue, a 28% increase sequentially compared to $8.8 million of revenue in the third quarter. We booked $10.1 million of new orders and acquired more than $2 million of backlog with Matrical, providing a total expansion of the backlog by $1.2 million in the quarter. Adjusted gross margins, you can see, came in at 37.2%, which included $0.5 million or a 4 point charge for inventory reserves to the adjusted gross margins for the segment. We added some expense structure in picking up Matrical and we do continue to ramp our R&D program to develop the automated storage solutions for the minus 150-degree environments.

On slide number 10, we show that revenue for the Brooks Global Services segment increased 4.4% to $23.7 million. The segment non-GAAP operating profit came in at $3.8 million. This drop primarily reflects the reversal of stock compensation in the third quarter.

Turning to slide number 11, we break out revenue trends of our business excluding the contract manufacturing business. As you can see from the bars in our guidance stack to the right, we expect modest growth in the first quarter of fiscal 2014, with expansion in semiconductor front-end product revenue and in Life Sciences revenue, partially offset by our normal seasonal contraction in the industrial market.

Turning to slide 12, we provide our guidance of expectations as we look into the first quarter of fiscal year 2014. We expect modest growth in revenue with a range of $119 million to $124 million. This reflects strong growth in semi markets combined with seasonally lower revenue from industrial markets and license income. We do not foresee repeating the profit benefits we saw in the fourth quarter from higher joint venture income or tax benefits. So in total, we project our non-GAAP EPS to be in the range of $0.04 to $0.07 per diluted share. As a reminder, we have excluded amortization of intangibles and special charges in our non-GAAP EPS. Consequently, our guidance for GAAP earnings per share is between $0.01 to $0.04 per diluted share. That completes our prepared remarks and I'll now turn the call back over to Kamika for questions.

Thank you.

(Operator Instructions)

Patrick Ho, Stifel Nicolaus.

Nice quarter, guys. First of all, Steve, can you give a little more color or little bit of granularity in terms of the specific types of operational initiatives that helped improve your gross margins, specifically, maybe more on the semi side? Because it looks like you guys did really well there. Is it based on manufacturing, material, supply chain? What were the biggest drivers in the improvements on that part?

Patrick, we had initiatives in a number of areas, but very specifically, material cost reduction which has been a program that we've been working on now for just over two years. The material cost reduction was very significant, cost of warranty, I had it almost 100 basis points to gross margin from a quality standpoint, from an operating standpoint, from the means by which we manage those activities in the field.

General operating efficiency, load balancing, and deload balancing and those kinds of things, I think were really instrumental. The operating model that's in place has objectives for each of the business units, very specifically, across a number of areas. This is something that wasn't a one-timer but rather a sustained and systematic means by which we've worked to produce the costs in the Company. So it's something where we have a long process going on. It's going to take us some time to continue but we do have opportunities continuing into 2014.

Great. Going to the Life Sciences side for a second, can you give us some of the milestones we should be looking for in 2014 in terms of continued traction because that business typically does have longer lead times? So are we to follow your order flow over the next few quarters to get a gauge on the traction you're getting or is it going to be turning some of the orders you've gotten this year into revenues? What are some of the milestones that what should we be looking out for?

So, Patrick, as we get comfortable of managing our pipeline, that's what we look at. We look at the systems that are in our pipeline and the level of priority and the timing we think which ones are funded and which ones are ultimately coming. We will share that with you in the form of bookings as we go forward and we'll also try to give you a little bit better indication of when you could imagine revenue recognition for those. But right now, building backlog is significant for us, managing the revenue is significant.

We're going to continue to see some lumpiness in the order patterns but because these projects really -- there's nothing that's related to turns, we do have a rather long look from the standpoint of booking until revenue. We'll provide as much guidance as we can there. So building backlog is important, the quality and the number of the orders that we take is going to be important. The quarter-on-quarter bookings is probably not quite as important, however, as the sustained smoothed out revenue, if you will, from continuing to win in this business.

Great, final question from me. Lindon, I noticed on the Q1 December guidance that the tax rate is at 35%. Is that something we should assume for the full year?

Yes, actually in the full year, we think we'll have some discrete items that will just help cap that down slightly. So I think if you take that 35% down closer to 30%, 31%, between that range is what we expect right now for the year.

Edwin Mok, Needham & Company.

Welcome to the team, Lindon. First question I have is on the guidance. If I take your numbers guided, it implied on a lower gross margin and higher expenses. Can you help me reconcile that?

Actually, as I said, some of the margin improvement that we saw had some benefits in the quarter that wouldn't repeat but we will continue to see strong margins. I wouldn't take it down very much on the gross margin side, it - just very, very modestly. In the expense area, we do look into the quarter and see just a modest increase because as we enter the year, we will restore accruals for variable compensation for employees, which had been reduced this past year. The significant difference in our guidance really is in the tax and joint venture income and that really is the big story in terms of the change in the earnings per share. We don't expect to have the tax benefit, as just mentioned in the previous question. We have a tax rate of about 35%, and then we have the joint venture income which we don't anticipate to repeat itself to the size we had in Q4.

I see. Do you guys expect to have any shutdown this December quarter that might result in a lower than expected expenses?

No, no, shutdown for us, Patrick -- or Edwin, sorry.

No problem. Okay, that's helpful. I have a question about the semi equipment commentary. You mentioned that you guys always have exposure in the back end packaging area which is -- you were seeing a little bit slow business at this juncture, right? Is -- did that impact the December guidance as well because of the backend?

Yes, the December guidance is -- I'm sorry, Edwin, you asked about the December guidance?

Yes, that's correct. Yes.

So the backend impacted December, probably the more significant than the backend is the Polycold product, which is the product that we ship for the manufacturer for the active displays for tablets and smartphones. So that's an even more significant reduction in revenue forecast from the September quarter to December.

I see; okay, that's helpful. Just moving onto the Life Science, when you look longer term, right, I think you talked about at least the automated cold store market being as big as $400 million market size by 2018, right? I was wondering what drivers will allow in this industry to move to that kind of size, right? And then in terms of Brooks, in order for you to capture opportunity to win this market, right, does it require that you guys have done a few more bolt-on acquisitions or you felt that you already have the product portfolio to go after this whole $400 million market?

Yes, so Patrick, of the $400 million market, we're making the investment and we have the people and the team to capture our share in that market. So that part we feel very equipped to go after with all the capabilities we have in the Company. In adjacent spaces that serve around this market, the transported devices, the consumables, and those kinds of things, it just added opportunities for us to increase beyond the $400 million market opportunity. But from the automated cold store standpoint, we are equipped and ready.

And just to give you some idea, to put it in perspective, the market that we're talking about that includes also manual storage. In a year, on average, there are more than 10,000 freezer and liquid nitrogen tank units that gets shipped around the world for storage of biological samples. So it's already an enormous market opportunity that means by which we can add some value to where automation will protect the samples and ensure that they are handled in a way that it can't be accomplished manual means. That's where the $400 million market out of $1 billion opportunity comes from.

I see, great. And the last question, Matrical, did that contribute to any revenue in the last quarter or do you expect that to contribute any revenue in the coming quarter?

Yes, we had just shy of $1 million of revenue for the quarter. As I mentioned in my comments that we did bring a little backlog in with the Company and it's contributing nicely going forward as a part of our portfolio.

Ben Pang, Northland Capital Markets.

First, on the Polycold, you commented on seasonality. Is this something that you've seen this pattern all throughout three or four years? Because I thought the first time you saw a big downturn there, the thought process was that you just had sold too many. That wasn't a seasonal impact. But now you guys are looking at that more as a seasonal situation?

Yes, Ben. When we went back and we looked at fiscal '12 and fiscal '13, almost within a few percent, each of the quarters was identical. So the seasonality that we observed in '12 was identical to the seasonality in '13. As a matter of fact, the quarters were almost identical and the drop between September and December on a dollar basis was the same in '12 as we've seen in '13.

Can you provide some color on why?

So Ben, I wish we could. We're two steps removed but we supply these to equipment makers who ultimately provide the coatings. So these are vacuum subsystems that go on to the coating tools to do and it appears as though the capacities in place to serve whatever demands come for the upcoming season, from a coatings standpoint for the active displays so we usually get a little bit of visibility. The order patterns here are usually pent up for some period of time until the makers of the device has ultimately released them and we hurry for a rush for delivery of tens and sometimes hundreds of units. And the visibility is not great. The advanced anticipation is tremendous. But as to when the orders get let, generally we've seen the June and September quarters be high and the December and March quarters be low.

For the Brooks' Product Solutions, what's the rough split for the full fiscal year between front end and back end?

I'm sorry Ben. One more time?

For your fiscal '13, for BPS, what's the rough split between front end and back end applications for revenues?

So I'll give you a number. The back end revenue run rate was approximately $25 million for the year, just to give you an idea. So it's a small component. And Lindon, you have the -- take a look at the -- so the front-end run rate, Ben, is about 10 times that.

So in terms of the guidance impact, is this because the back end significantly lower? Why doesn't this just have no impact, is my thought process. I didn't think revenue really would have an impact in terms of the guidance on the backend application.

We tried to give some color for the offset, for the relatively muted revenue guidance. Ben, if you think about even $2 million on $100 million has enough of an impact that, that's -- we think worthy of --

Fair enough.

These considerations (multiple speakers).

That is fair enough. (multiple speakers) And last question in terms of the -- your core business, you mentioned your visibility into the March quarter, and you've been in this industry for awhile. Are you seeing better than historical visibility or is this just typically what you would see when the industry starts to turn around? Has anything changed in terms of your particular [segment] that gives you any better visibility?

No, Ben, I think the visibility is very much where we would expect at this time in the cycle. We get orders for the December quarter and we get some advanced indications about what the order patterns are going to be for March, but we don't have -- we neither have better nor worse visibility; it's about the same.

Okay, and then finally, just a couple of questions on the Life Sciences. The service revenues on the Life Sciences -- are inside the Life Sciences [pot]; is that correct?

That's correct.

How should we think about that now? Because your install base is growing pretty significantly. Is it very similar to your other types of products that after a year, is when you'd start to see some higher contribution of service revenues one year after shipment, that type of thing?

That's pretty typical. Ben, Just to give you an idea, the service business in the Life Sciences is approximately $3 million a quarter.

Okay, okay, and then finally --

The uptake on contracts there is pretty significant. We're protecting the assets, if you will, of some of these companies.

Okay and if that contribution of the service within the Life Sciences revenue segment increases, does that change the gross margin of the Life Sciences segment?

Actually, we see somewhat comparable margins. We don't expect that, that's going to be a significant swinger in the near term. Over the longer term, we certainly, as we build this business model, we think the services business provides a lot of stability to our revenue and profit margins. But right now, I would not point you to expect higher or lower. We're seeing it come in very close to each other.

So it's still like a mid-40%s gross margin; correct?

Yes, I think you're -- that's their target is to have this in that range.

Okay, and last question. In terms of the market size for 2013, what do you think your market share will be? Who is your main competitor there for the automated storage?

We have two main competitors. One is a company, Hamilton and the other one is a company called Liconic. Both are private companies, but those are the two main competitors in the space. When we go after these minus 80-degree cold stores, we think far and away, we're the market leader there. We don't have all the visibility but we have a lot of feet on the Street to understand when we do and when we don't win but right now, we're winning what we believe is something in the order of 70% of the new systems.

Jairam Nathan, Sidoti & Company LLC.

Two questions on the Life Sciences side. The $30 million backlog, how should we think about the timing at which you will start you'll be delivering these products?

Yes, so Jairam, on the Life Sciences, every quarter, we'll be recognizing revenue here. I think of the $30 million in backlog, you should anticipate that over the next two quarters, a majority of that revenue would be out. But it will take four quarters to exhaust everything that's in backlog right now just because the timing of delivery of some of these projects. And the larger ones are done by percentage of completion accounting, so as the revenue recognition comes as a result of both the cost and the energy that we put into completing these systems and ultimately, the customer sign off. But for the most part, the $30 million will be recognized in revenue in four quarters. More than half, I would say over the next couple of quarters.

Okay, and the $400 million that you talked about, does that include the smaller bio store that you're developing and how is that development going in general?

That is correct. So the $400 million, it constitutes what we think for minus 20, minus 80, and minus 150 degrees, the automated cold stores. The development activity is going particularly well. We still have work to do to productize but from a technology development standpoint, we think we've cleared considerable hurdles. The number that we have for the market of $400 million is 2018 and will require a system to be completed to be part of the market creation here. But it is embedded in the $400 million market opportunity.

David Duley, Steelhead Securities.

I was wondering, could you give us the breakout by segment for the September quarter as far as revenue goes, like front-end, backend, industrial? Rough breakouts?

I can give some color to that. In the front end space, we have approximately $56 million of revenue, down about 3%, as I said in my comments. In the adjacent space, I referenced a 7% drop quarter to quarter. And that was about $15 million. And in the industrial space, we were down also about 3%. That was about $12 million.

Okay, so the backend and the MEMS and all that stuff is in the adjacent space? I just wanted to clarify that.

That's correct. That's correct.

Could you talk about just your front-end business? You're definitely seeing a ramp-up of memory spending now with the big Korean guy. Could you just talk about the segments of the front-end memory and logic and foundry and what you're seeing from the segments that you can see through your big large OEMs?

Yes, Dave, this is Steve. I think we'd be hard-pressed to have that kind of granularity as we don't get that kind of look from the customers who we serve. So whether it's for logic, for memory, if it's for an implanter or sputtering tool, or an etcher, we don't know very specifically and it would be tough for us to determine. But what we are pretty confident in what we think semi looks like generally and we are experiencing health in that business in December and then extending into March. But I -- we wouldn't be able to provide you granularity based on our look from here.

Okay. Maybe another way to ask it is what's the commentary from your two largest OEM customers in this segment? What are they telling you to expect going forward?

Yes, I think -- again, I think we see order base, we're close to them obviously as we're key suppliers to them but they don't share nor they feel compelled to share that kind of granularity with us but the business, I think, continues to feel positive for all of our customers, actually.

Okay. I noticed, I think it was in one of your slides, there was a deferred revenue payment of $20 million for an upfront payment of some sort. Could you just talk about what that's associated with?

My apologies. I'm struggling to reference the same number that you are referring to.

Slide 7 in your condensed balance sheet, there is a deferred revenue. And the commentary is customer upfront payment for the DLSS.

So, Dave, it's customary, actually, in the Life Sciences business for us to get upfront cash payments from customers for some of these large projects that we do for them. This is a historical thing from some of these small companies that we acquired, but it's actually very helpful from an asset management standpoint.

So that's an upfront payment and you'll do the percentage of completion method on that?

Yes. So we get sometimes, we get for service contracts in for the payment on some of the large storage, there's a -- often a significant cash upfront payment for those activities.

Okay, got you. The other thing for me is (multiple speakers) early on in your prepared remarks, you talked about a Crossing and a Logic win in project. Could you just give a little bit more detail about what you're involved with on that, whatever you can talk about?

Sure, very simply. The Spartan Sorter is a product that came to us from Crossing Automation, and there are some next-generation challenges, if you will, as we go down towards 20-nanometer and 14-nanometer there. The Spartan Sorter is very fast, very clean product and for whatever reasons, we had a chance to compete and then we think we delivered a product that we hope will delight the customer. It had some pretty significant challenges from a software standpoint but we had an engineering team to apply to it and just required some customization and adaptation, if you will. And the ability to respond quickly allowed us to win one on pretty straightforward application, but ultimately it's to be qualified for 14-nanometer even though it will likely be used at factories before that.

The other application actually is for backend application where we had to modify this Spartan mechanism to handle something that's different from a conventional wafer, something more along the lines of a tray with a modified carrier as well. And the ability to do that allows us, we think, a good chance at both the sorting application and because the configuration of a sorter is very similar to the front-end module on a tool, the ability to handle this unusual configuration put us in a position to also provide a variation of this as a EFEM, if you will, for other companies serving this back-end customer.

So both of them are significant and both, we think, will lead to more business but those constituted both significant spends, significant engineering activity in the quarter but we're really pleased with the outcome. Probably can't say too much more, but good leverage adaptation and use of the capabilities that existed in Crossing Automation may be brought by the fact that it's good for that technical capability now to be part of a little bit larger Brooks.

Okay, excellent. Final question for me is, could you just remind us what the Life Science breakeven is on a quarterly basis and did the Matrical acquisition change that?

We anticipate that we'd be breakeven at a, about a run rate of $15 million. Matrical isn't specifically going to change that. As that business came in, we don't see that as being specifically accretive immediately nor do we see it as a dilution effect. So I would still expect that we need about $15 million and with Matrical, I suppose you might say it's $15 million to $16 million but we think at that level, we think we will be at a breakeven point.

Brett Piira, B. Riley & Company.

Maybe just circling back on the Life Sciences breakeven, I thought previously you talked about $18 million breakeven run rate, so can you just talk about what's changed there?

Well, I would just comment on this. I think this is a moving target for us. We're looking to get this breakeven point down into the '15, '16 level. So I -- doesn't -- frankly, I'll just tell you in the six weeks I've been here, I have not ever heard or talked about an $18 million breakeven point. We have been targeting this $15 million. So as we ramp our revenue up, we're going to focus that by the end of this coming calendar year, in the December quarter, next year, that we get this thing past the point that we're talking about.

(Operator Instructions)

Edwin Mok, Needham & Company.

Two quick follow-ups. First is, Life Science gross margin came down sequentially. What contributed to that?

In the Life Sciences, actually we had a pretty decent quarter but we did absorb an inventory write-down and you may have noted that we talked about an impairment as well of the Celigo Instrument assets. These are some -- a product line that we had acquired back in 2012, but we took some write-down of inventory related to those products as well as the impairment on the intangibles. What's in the segment is just a write-down of the inventory.

I see, okay; that is helpful. And then for the December quarter, how much amortization are you baking into your non-GAAP or GAAP adjustment?

Yes, thank you for asking. That -- it's a good clarity. So there's about $2.5 million of total amortization in our P&L that when you go from GAAP to non-GAAP, you would back out $2.5 million. That's just about $0.025 per share after tax.

I see. Do you expect any restructuring charge for the quarter?

We have some small restructuring in there so that would be the additional difference between the GAAP and non-GAAP, less than a $1 million, call it $700,000 to $800,000.

John Pitzer with Credit Suisse.

This is Farhan Ahmad asking a question on behalf of John. Can you please remind us, like what's your Crossing revenue run rate right now?

Let me give it to you this way. Because this business is integrated into our services business, so we have tracked the acquisition revenue and Crossing in total has just about $40 million of revenue contributed this past year. And that $40 million though, I would just tell you, going forward, we probably would not disclose this because It's so integrated into our Automation business. I think it's a good question because we were very focused on the tracking to the synergies, the revenue synergies as well as contribution as well as the cost synergies. Going forward, it's going to be very difficult for us to break that kind of number out.

Got it. My next question is on your slide 11, you showed quarterly revenue by segments. One thing that stands out to me is your revenue run rate in 2013 second half relative to revenue run rate in the first half of 2012. And if I look at that, like your revenues have dropped from about $80 million in the first half of 2012 to about $60 million in second half of 2013, which is about 25%. If I look at your peers, for the same period, the comparison of revenues are up 7% from first half of 2012 to the second half of 2013. So I just wanted to understand like what's the reason that you had such a big decline relative to your first half of 2012? Is it something driven by your Korean OEMs that were probably strong in first half of 2012? Or if you could just elaborate on that, that would be helpful.

Sure, I'll take that gladly. Actually, If you go back to the earnings call that we had at that time, we had a run rate actually of $10 million from our Korean OEMs. We went from $10 million to $1 million in the period of one quarter. The other thing is we talked very specifically about some products that we've discontinued or sold or gotten out of. And when we made a conscious decision to do that to make sure we are focused on products that ought to be supported and generate real profitability in gross margins for the Company, in -- it's a little bit difficult to do it on a quarter by quarter basis but in 2012, the amount of revenue from products that we no longer sell and support was approximately $25 million.

That's revenue we elected not to continue; it was $25 million in 2012. It's difficult to say what that would have been in 2014 or even today. But also to put some perspective, these are not small revenue numbers from a discontinuation standpoint. It was calculated, meaningful and we think beneficial ultimately to the shareholders. So those are the two main issues; in other areas, we've continued to gain position, gain share and keep up with the customers who are still strong players in the space.

Got it. If you could just talk about your outlook that you're seeing from your, for your March quarter, from your Korean OEMs versus your other front-end OEMs, that would be very helpful. I just wanted to see if there is a way for your Korean OEM revenues to get back to the levels that they used to be in first half.

So we're not going to get into too much detail on the specific numbers, but we're getting close to prior numbers and we're not out to guiding March yet, but the activity is significantly up for sure.

So you would expect -- would you expect March to be up from December or --?

A little bit early for us to comment on that specifically at that granularity.

Thank you. That was our final question. I would now like to turn the conference back over to Mr. Steve Schwartz for any final remarks. Please go ahead, sir.

Thank you everyone for your interest in Brooks and we look forward to speaking with you when we report results from our fiscal 2104 first quarter. Thanks everyone.

Thank you ladies and gentlemen. That does conclude the conference call for today. We thank you for your participation and we ask that you disconnect your lines. Thank you, and have a great day.