Azenta Inc (AZTA) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Q1 fiscal year 2014 financial results conference 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, Thursday, February 6, 2014. I would now like to turn the conference over to Steve Schwartz, Chief Executive Officer. Please go ahead.

This is Lindon Robertson, the Executive Vice President and CFO for Brooks. I would like to welcome each of you to the first-quarter financial results conference call of Brooks's fiscal 2014 year. We will be covering the results of the first quarter ended on December 31, and will provide an outlook into the second fiscal quarter ending March 31, 2014.

The 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 illustrated 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 our various filings with the SEC, including the Form 10-Q for the first quarter ended December 31, 2013. We make no obligation 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 to, in addition to, and in conjunction with, results presented in accordance with GAAP. We believe that these non-GAAP measures provide an additional way of viewing aspects of our operations and performance. But when considered with GAAP financial results and a reconciliation of GAAP measures provide more a 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's Chief Executive Officer, Steve Schwartz. We will open with his remarks on the business environment and our first quarter highlights. Then, we will provide an overview of the first quarter financial results and a summary of our financial outlook for the quarter ending March 31, which is our second quarter of 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 everyone, again, on the investor relations page of the Brooks website. So with that, I will turn the call over to Steve.

Thank you, Lindon. Good afternoon, everyone, and thank you for joining our call. We are pleased to have the opportunity to report the results of the first quarter of our 2014 fiscal year.

In the December quarter, we continued to build on the strong momentum we generated over the four quarters of fiscal 2013 with another sequential increase in quarterly revenue and gross margin, a nice uptick in bookings, and achievement of some significant market position milestones that continue to set us up well for 2014 and beyond. Like other suppliers to the front-end semiconductor capital equipment space, we experienced significant revenue growth in that portion of our business. And we, too, are positive about the outlook for 2014.

Our life sciences business gained in market position and profitability, and our Brooks global services business continued to show steady improvement and stability, which is a hallmark of this important franchise. Before I get into some specific elements of what drove our business in the quarter, I would like to give some color on what is the sum of many moving parts.

On our call last quarter, we gave some specifics as to how we saw our December revenue breaking out in our VPS segment. We anticipated quarter-on-quarter revenue growth in the semiconductor front-end business, somewhere in the range of up 10% to 20%. We contemplated a second consecutive quarter of double-digit percentage dip in our back-end revenue, and we estimated that revenue from our industrial products would be down by approximately 40%.

To summarize what we experienced in the December quarter, our semi front-end business actually increased by 21% from September. Our back-end business was indeed down by double-digit percentage and a seasonal 34% decrease in the poly-cold product demand for tablets and smartphones displays caused our industrial market segment to decrease by approximately 24%.

In effect, our projections were almost exactly on track, but with semi front end a bit stronger than forecast. Looking into 2014, we see continued strength in the semi front end, and we believe that our backend and industrial segments will strengthen later in the calendar year.

I will now give some of the highlights from the business units. Throughout 2013, we continued our healthy investment in new product development. As we reported on a previous call, fully 60% of our VPS revenue now comes from products -- or new products or ones that we have enhanced during the last three years. We will continue to maintain this aggressive investment and product development to ensure that we are able to get our products designed in to OEM tools that will drive our future business.

As the industry continues to consolidate, we are channeling more of our attention now on larger OEMs and Tier 1 end users where our investments will generate a higher return. Necessarily, it will still take time to secure wins, but the payoff should be greater in terms of market share and profitability. We have a retooled company over the last three years to focus on the critical core capabilities that are necessary for success -- faster time-to-market with the best technology and quality and with leadtimes to enable us to deliver without delay in any kind of [realm].

Our design win activity in the quarter remained very strong as we captured another 10 design wins. Four were for systems that include our vacuum robots. We also had three more wins for standalone MagnaTran vacuum robots. Additionally, and perhaps more importantly, we shipped two evaluation units of our next generation Mag 9 robot for evaluation and development platforms for two systems in Tier 1 OEM tools. And although we do not yet count these as design wins, it is an extremely important step toward qualification in these next-generation platforms.

We continue to be fully engaged with Tier 1 OEMs. And the fact that we have continued to develop our next generation products to be in front of their requirements has allowed us to be more active participants in their product development roadmaps. The speed, flexibility, and technical capability we possess makes us a logical and necessary partner to help them get products to customers faster.

One important element of our BPF strategy has been to leverage the crossing automation product platform to drive additional revenue growth, both at OEMs and for products that we sell directly to end-users. We have just launched a new comment platform tool front end that supports the crossing automation wafer engine, and we plan to have at least five customers on this new platform by June. More importantly, we have won new sorter business at two major logic customers. One for a design -- a new design application and one by displacing a formerly intent entrenched competitor.

We are working on some additional end-user products related to wafer cleanliness and the efficiency of the automated material handling system. The crossing automation platform gives us tremendous access to and credibility with the important end-user accounts.

On past calls, you have heard us mentioned one part of our automation business that is uniquely related to Korean business. There are a number of very capable Korean semiconductor capable front-end process companies who supply almost all of their products to Korean IDMs. Over the last few years, we have continued to gain a large share of their automation platforms, and we see significant moves in this business that correlates very closely with the Korean capital spending.

We continue to enjoy business where we are the incumbent provider of vacuum platforms. But over the last two quarters, we are particularly pleased to see meaningful revenue from one of these equipment makers from whom we won their business platform by displacing a Korean automation competitor. We have been trying to win the vacuum system business at this customer for several years, and finally we were successful.

Over the last two quarters, this has been become a multimillion dollar account, and we believe this is testament to the best product winning over price or local supplier. One additional point about this Korean OEM business -- even though this business is largely limited to Korea for now, the platforms that we have developed for their tools are quite sophisticated and are part of the portfolio of products that we offer to our customers around the world.

Now, I would like to give some commentary about our life sciences business where we had an outstanding quarter. We grew revenue to $12.2 million, a sequential quarterly increase of 8% from the September quarter, which, if you remember, was up 28% from the June quarter. Gross margin came in at 47%, up from approximately 37% in the September quarter. And as a validation of a strong momentum we have continued to build in 2013, we have booked just shy of $20 million worth of new orders, which were driven by the rapid acceptance of our new twin bank product architecture.

From a market position standpoint, we hit a multimillion dollar order for systems from a major pharma company. We secured a $2 million-plus automated system order from a Nordic biobank. We received orders for our Sprint 6 software solution at two pharma companies. And orders for recurring revenue business consisting of services and consumables represented about one third of the total bookings.

We are also pleased to note that over the last two quarters, we have had orders for a total of 13 new automated cold stores. Nine of those 13 stores were for our new twin bank architecture products, the SampleStore II and the BioStore II, which we launched only last spring. The rapid customer acceptance and adoption of this system concept demonstrates the value of the significant features and improvements of the twin bank, and we will continue to utilize our engineering strength and close customer connections to stay ahead of the needs in this exciting market.

Our bookings pipeline remains robust, and this year we look forward to delivering revenue in excess of the 20% CAGR that we estimate for this market. The 47% gross margin we achieved is meaningful in that we have stated a good near-term gross margin for life sciences ought to be approximately 45%. To consistently go beyond this level, we will need to add more revenue to the top line. But for now, we continue to assert that 45% is a good number for the business around these revenue levels.

Our outlook for the life sciences business remain strong. Our guidance for the March quarter is for revenue to be approximately flat with December, but this forecast in the face of such significant bookings requires a bit of explanation. Although our revenue guidance is approximately flat, we plan to deliver a few million dollars worth of product for which revenue is tied to some acceptance criteria that we anticipate will occur in the June quarter. Suffice it to say, that we are very busy in the factory and ramping our production capacity.

All in, we remain particularly bullish about the growth opportunity in the life sciences market in and around the automated cold stores business. In just the last three quarters, we have booked a total of approximately $50 million of life sciences business. When we compare this amount with our total revenue of $43 million for all of fiscal 2013, you can begin to understand our enthusiasm for the growth potential in this market.

Overall, our position has strengthened as a result of our focused investment and new product development. We continue to invest to develop the next-generation system for the automated management that sells in tissue at ultralow temperatures, and we are simultaneously focused on driving the current business to profitability while we are developing our future in this space.

Overall, we are extremely pleased with our operating performance for the quarter. We continue to develop our operating model, which is allowing us to deliver sequential improvement in gross margin and better inventory turnover. We continue to drive cost reduction initiatives and footprint reductions, and the results of our steady and methodical improvements are showing up in our profitability. Gross margin improved 30 basis points from the September quarter, and we have initiatives in place that give us confidence that we will continue to deliver improvements in this area.

We have created a company that can generate significant cash. We participate in markets which provide meaningful opportunities for growth. So in addition to our quarterly cash dividend, we will continue to invest in both R&D and acquisitions to build our business. Our goal is to be the leader in the markets where we compete and to make the best and most productive use of our assets to maximize shareholder value.

In terms of our outlook, we can continue to see growth in the front-end semi market that is consistent with what the equipment makers have guided to in terms of shipments. We're holding steady in our industrial and semi adjacent businesses this quarter, but we are not ready to guide these businesses up until we hear differently from our customers. We believe that our life sciences business will continue to expand throughout the year, and we are looking again forward -- we're looking forward again to having a healthy book-to-bill ratio in the March quarter.

We remain positive about our growth prospects in 2014, and we are in the best position ever to make the most of the opportunities that we have created for ourselves. That concludes my prepared remarks, and I will now turn the call back over to Lindon.

Thank you very much, Steve. I refer once again to the PowerPoint slides available on our website. Turning to the slide 3, the first quarter results reflect top-line growth of 5% sequentially, which is also an increase of 27% compared to the first quarter of 2013. Gross margin expanded for the third consecutive quarter, reflecting further benefits from operational improvements and our continued shift to the portfolio toward higher margin offerings.

R&D spend in the quarter was $13.2 million, similar to our fourth quarter of fiscal 2013. Investments here drive continued design wins in the semiconductor front-end and adjacent spaces, as well as our life sciences systems initiatives.

SG&A in the quarter increased to $25.3 million compared to $24.5 million in the fourth quarter of fiscal 2013. The increase was driven by restoring the normal accrual for performance-based compensation, which was significantly reduced in 2013.

As slide number 4 shows, GAAP net income for the first quarter of fiscal 2014 was $3.4 million, or $0.05 per diluted share. While operating profits increased, this page shows the other items which resulted in the sequential drop in earnings per share for the quarter, most of which were anticipated in our prior guidance.

Special charges of $1.4 million include restructuring and impairment of intangibles and costs associated with recently completed acquisitions. GAAP taxes came in at a more normal 33% rate for the first quarter, compared to the significant benefit we recognized in the previous quarters. And joint venture income came in lower than the fourth quarter, both of these which were just as anticipated.

On the non-GAAP measure, our adjusted net income was $6.1 million, or that $0.09 per diluted share, as you see on the chart. Turning to slide 5, EBITDA was $14.8 million or $1.4 million higher than the fourth quarter, driving operating cash flow of $8.5 million. We did see a modest investment in working capital with a decline in payables. After paying shareholders $5.4 million in dividends, the increase in our cash and marketable securities was $2.3 million, driving our balance at the end of the first quarter to $175.7 million.

On slide 6, you will see a healthy balance sheet. It starts with the increasing cash balance just referenced, but we also performed well in the quarter on inventory and receivables with improving turnover in DSO. The deferred tax assets of $115 million are also significant to us. While our GAAP tax rate was 33% in the quarter, our cash tax rate in the quarter was only 7.4%.

Turning to the business segments, we start with Brooks product solutions on slide 7. Total revenue for the first quarter was $88.7 million, a 7% increase from the previous quarter of $83.2 million and a 41% year-over-year increase. The revenue into the semi front end improved 21% compared to the fourth quarter. As referenced earlier, gross margins were one point softer compared to the fourth quarter when we had benefits from reserve adjustments, but this is still 5.7 points higher than the 2013 first quarter.

We believe these gross margins are sustainable and will continue to benefit from operational efficiencies. The operating expense here increased due to the performance-based compensation accrual being restored on a quarterly basis.

The global services segment, on slide 8, shows consistent revenue with the fourth quarter and is up 12% compared to one year earlier. Profit for performance came in as expected, and again, operating expenses reflect restoring that performance-based compensation accrual.

Turning to slide 9, our life-sciences business came in with $12.2 million of revenue, 8% sequential growth, as expected. We delivered our first systems, built on a twin bank product architecture, and as Steve described, we are seeing good traction in the new orders. Margins are strong, and with this P&L, we can see the track to get to the breakeven point by the December quarter, with $15 million to $16 million of revenue and some modest cost reductions.

The life science business finished the first quarter with $33 million in 12-month backlog. Turning to guidance on the second quarter, we expect total revenue to be in the range of $126 million to $130 million. This reflects continued recovery in the semi front-end market, with sequential growth of approximately 7% to 10% and growth in the industrial market of 12% to 15%.

In our life-sciences systems segment, we anticipate revenue to be the same in Q2 as Q1, as a significant portion of our contracted business this quarter will be recognized as revenue upon completion in a future quarter. Within the EBITDA guidance of $12.5 million to $15 million, gross margins are targeted to be consistent with the first quarter, but we face some increase in operating expense and less joint venture income in the quarter.

We do expect operating expenses to return to levels similar to Q1 thereafter. We project non-GAAP EPS to be in the range of $0.05 to $0.09 per share. That completes our prepared remarks, and I will now turn the call back over to the operator for questions.

(Operator Instructions) Edwin Mok, Needham and Company.

Good quarter, guys. So first question I have on the guidance, just kind of wanted to get some color. How much of that was coming from -- is going to be coming from semi versus other part of your business? Is it all front end semi? Or any additional color you can provide regarding life science or just service revenue.

This is Steve. To our best estimate, the uptick in the front-end semi we estimate somewhere in the 5% to 10% range, up for Q2. We see the adjacent space going down again, so that gives you most of the color here.

I see. Do you expect that trend to continue into the second quarter -- or sorry, calendar's end quarter and beyond?

Again, Edwin, we are hopeful, but we go based on what our customers say. So we remain positive based on their commentary, but we don't have better visibility than that right now.

I see. I noticed that your operating profit for your Brooks products group has actually come down a little bit. Is that all just come from that write-down that you mentioned on the call? Reduction of gross margin.

Yes. So in the first quarter, Edwin, it only has about $200,000 of additional profit at the bottom line for Brooks products solutions. And as you noted, we had a little softer gross margin. You may recall on the previous call last quarter, we highlighted that we were very pleased with the margins, but we wanted the analysts to understand that a little bit of that came from some reserve adjustments because of the efficiencies in the business. And that that would not repeat every quarter. So, actually, these gross margins came in very close to what we were anticipating and what we had indicated.

I see. That is fair. And then, one question on the life science area. On the life science, I think you guys talk about this breakeven point. As we know, the business has been kind of lumpy on that end, right? How do you think about the market right now? Do you think that do you need to win a few big contracts for you to get there -- get to your breakeven point? Or do you think of the business is going to be smaller, deals where you have to win a lot more and (inaudible) broader? Any way you can kind of quantify or describe how the business is trending and how you think you can get to that breakeven point?

Yes. I think it's a very good question. This is an exciting part of our business. First, let me just reiterate we had a really terrific signings -- booking of new orders this past quarter. And as we highlighted, we put -- we closed the quarter with $33 million in backlog. So, we are very excited going into the rest of the year. On the profit side, when you look forward to that December quarter, in which we talked about getting to a breakeven point, with $15 million or $16 million, we have got time here. One, with that backlog, we have a lot of confidence of being at that revenue level, which would be a significant run rate above last year's revenue rate of $43 million. We would be looking at $60 million run rate when we leave this year. Secondly, on the breakeven, those margins at 45%, what we are looking for is continued cost improvement and some synergies from the expenses. So, we think between some reductions in the cost and expense and that revenue, we will get to that breakeven. So it could be at the 45%; it could be a little bit better margins that get us there.

Edwin, we also have the opportunity here to take advantage of benefits from absorption, as we continue to add more revenue into the business infrastructure that we have. So that -- we think that we are in a good position and on track to continue to meet our commitments.

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

Jairam Nathan, Sidoti and Company.

I just wanted to kind of -- wondering if you could spend a little more time on the adjacent markets. I know you are guiding for the weaker second quarter. And what really makes it in the second half? What are some of the things that you are looking for?

This is Steve. So one of the things that we anticipate will pick up, we hope will pick up -- would be some of the back-end business. So the back end has been a little bit down, and we understand from the commentaries -- we listen to our customers -- that they anticipate the back half of the calendar year start to be up. So that will be meaningful for us. We also talked on the industrial side, we talked about the cyclicality we have observed that is seasonal in nature, and historically, our Q1 and Q2 have been down. Our Q3 and Q4 have been up. And if the past year's -- if that pattern continues, we would anticipate the seasonality of that would bring the business back a little bit in our third and fourth fiscal quarter.

Yes. You know, you have in the past given -- broken down your back-end business revenues. Can you give us an idea what it was, just to kind of understand the magnitude in the December quarter?

We don't want to be too specific, but we had the business up to a bit more than a $25 million run rate on a quarterly base. And we are now beneath a $20 million run rate, to give you a little bit of perspective.

Okay. And my other question was on gross margin. So as this front end kind of strengthens and adjacent markets come down, how is that impacting gross margins? As these markets improve, how should we expect the gross margins to react?

Well, in the automation space, we are pretty pleased with our margins and our capabilities to service that space. So, I don't anticipate that you are going to see a significant change in the margins. What we are excited about are some of those wins in the back end as that does develop. We have had a strategy of being, one, innovative in terms of the design wins we get and diversifying and making sure that we are focusing on the things that will impact our business positively. And as we have shared in the past, we have taken some of the products out of our portfolio that were less productive. So, I think we are confident in both the front end and the back end to help contribute to our margins.

Jairam, just one more thing. Of the 10 design wins we had this quarter, four were for new back-end applications. So, we continue to make investments in that business. And as it grows, we anticipate that it will continue to drive a good profitability for the Company.

Okay. Thank you. I'll get back for other questions.

Patrick Ho, Stifel Nicolas.

Likewise, really nice quarter. Steve, you have talked about design wins in the past, and you mentioned 10 new ones this past quarter. Some of the applications or processes that you mentioned in the past have been drivers were like advanced packaging. I guess maybe a two-part question on that is. One, what do you see in that marketplace. And two, were some of the design wins targeting that marketplace given the emergence of a lot of those processes?

Thanks, Patrick. Yes. As I mentioned a second ago, 4 of the 10 wins were for back end for some of these advanced packaging applications. I think the fact that we have been pretty aggressive about going after those and we have technologies that serve them particularly well. Our ability to handle things that are different from a single rigid silicon wafer has been a big benefit to us in a number of markets. So, we have been aggressive about it, and we have seen a lot more opportunities because of the relative new applications that are coming along. They are our new competitors and people developing tools that haven't been in the marketplace before. So if we are first in, we seem to have pretty significant opportunity. So, we do like that as a business. And we also believe that it's going to be a good long-term grower here. We understand that things are down right now, but we believe in the long-term potential here.

Great. Going to the life sciences side of things, you had a really strong orders quarter. And obviously, your visibility and your discussions with customers are probably improving as well. Is there a bias one way or the other between the SampleStore and the BioStore in terms of the new twin bank solutions? Are you seeing one more than the other or is a kind of even on both of those fronts?

So Patrick, the sample store is typically for storage of chemical compounds at minus 20. So there is a very -- these are -- you either need a bio store or a sample store. The bio stores are typically for biological samples at minus 80. The compound store market is typically pharmaceutical companies. And that is a business that grows steadily, and it is pretty dependable. We are seeing acceleration on the bio side.

And the some of the biological stores are for pharmaceutical companies who have biological stores, but most of them are for research institutions or people who are doing very specific work with biological samples. The modular nature of the product allows us to build some pretty high capacity stores, and so this design allows it to be configured, if you will, for people who need from a few hundred thousand samples up to millions of samples. So it is a product that suits both bio and pharma for a number of different applications. And I think that is what is leading to one of the tremendous benefits of the architecture, actually.

Okay. Great. And then, final question in terms of the margin profile. You had a really good quarter in terms of the life sciences gross margins. But, generally, and I think, Steve, you noticed in the past, the semi side of things, typically new products tend to have lower gross margins until they kind of get to the volume ramp. What have you done differently on this new twin bank product that is allowing you to get these really good margins, pretty much from the outset?

Patrick, I don't need to be flip, but to build more than one of the same product has been great. So one of the things we try to do was to really standardize on this architecture. So we really emphasized the architecture here. The companies that we acquired, the products that they developed, there was a lot of custom work there. And so, I think we designed the products so that we could, indeed, have lower cost structure. And I think early indications are that we have been pretty successful there. So, one of the reasons to drive this was so that we could continue to leverage the investments that we made and sell products with mostly like [builds] materials.

Great. Thank you very much.

(Operator Instructions) Ben Pang, Northland Capital Markets.

Congrats on a good quarter. First, on the life sciences business, is your overall growth rate expectation for the space the same now as it was a year ago? Has that changed at all?

No, Ben. We still think it is about a 20% growth rate.

Okay. And then, when you look at the -- I think you guys have also introduced to some new software products though, correct?

We have.

Is that wider than -- I guess a little bit of a difference in the gross margin quarter to quarter, does that have a bigger impact depending on how much of a percentage of shipment the software accounts for?

Actually, not this quarter, Ben. We didn't see a significant change in the amount of software content. What we do, though, you are sensitive to a mix point, and we do -- we will remind everybody that we generally have about half of our business in the storage revenue. And then we, generally, the other half is split between consumables and services. And I am happy to say that we saw positive margins at actually all three pieces of this. And so, and as Steve pointed out, what we did see as well is some good cost absorption. Everybody is busy right now in the life science business. And as we have seen that business ramp, the backlog gives you a good indication of just how busy the factory floor is. And some of this business flows immediately, and some of it is long-term contracts with a lot of built structure to go out into future periods. So, we have a lot of things underway and that is helping the absorption cost.

Very helpful. And then on the Brooks products solutions, the semiconductor front-end side, if you look at the relative growth rate between the December quarter and March, is there impact from the Korean OEMs or is that across the board for all the OEMs? (multiple speakers)

Yes. That is pretty much across the board for all the OEMs.

Okay. And then, I think you mentioned in your opening comments that -- I forgot the exact wording, but you guys are shipping more new products now on a relative basis. Your new products continue to gain traction. Does that have actually a negative margin impact, following on what Patrick commented on earlier in terms of some of these newer products having lower gross margins?

I understand that dynamic that was described because often when you step into a new product in your first builds you face some cost hurdles. But actually, I am really pleased to talk about this because, what Mark Morelli and operations team has done here is really started designing costs in as part of the development step. And so when we go into the design stage and we focus on the solutions and really the targets of where we want to win, we are looking for something that we can design costs into the product as well as replicate that product over multiple sales of that same product. So, both allow us to continue to gain cost benefits going forward. But we actually, as we shed some of the less cost-effective product that we have been talking about over past quarters and pick up these newly designed products, we are actually seeing that lift occur for us. Frankly, I would say we have overcome that type of challenge that you are referring to, and we are seeing benefits as we refresh our product line.

That's good news. The final question for me is in terms of the packaging -- the back-end side of the business. Aren't you guys relatively more weighted to the advanced packaging stuff? And at least it looks like the utilization rates, based on our checks, seem to be okay. Why is there a reluctance in your view for the industry to spend on the advanced back end stuff? Or is your mix more broad in terms of backend applications?

Ben, this is Steve. You broke up a little bit, but I think you asked if we are more weighted toward the advanced packaging or broader mix. We have penetrated a pretty significant number now. So I would say, although we don't have that kind of granularity broken out exactly, we have a pretty broad mix across the back end.

Okay. Thank you very much.

John Pitzer, Credit Suisse.

This is [Surhan] asking a question on behalf of John. First question I have was on the life sciences gross margin. You had a very [interest] of gross margin in the December quarter, and if I compared it from a year ago, at a similar revenue level, you are almost up 10 points. So one question I had was in regards to the March quarter, you mentioned a similar revenue level, you would expect gross margins to be about 45%. But then, as I think about the second half of the year and going into next year, your revenue profile should be at a higher revenue level. So, I just wanted to understand what should be the expectations for the gross margin as you ramp your revenue to higher levels in life sciences.

I think it is a very fair question, but we will continue to guide at this point, to set the expectations around the 45%. And, frankly, this is -- this indeed gets some benefits from volumes, but we also need to recognize that within the $12 million that we recognized this quarter we have contracts of varying sizes. Some of these vary to $1 million to $2 million apiece. And each contract will have a pricing equation that can impact the margin in a given quarter.

So the business, as we have described in the past, can be a little bit lumpy in the bookings as well as in the revenue and the contracts that we work. So it depends a bit on the mix in the quarter. But fundamentally, at the base of the business, we see traction on the new product platform that Steve described as being helpful to us. We see the increased of volumes being helpful. And so, we would expect that this business can do better than 45% in the future, but for now we would say it is better for us to have the expectations of 45% because we do expect there will be some quarters that we go back down to the 40% level like we have in the past. And some quarters we exceed that level.

Got it. Thank you. That's very helpful. My second question is regarding the comments that Steve mentioned in regards to the changing strategy of focusing more on the Tier 1 customer. So just wanted to understand is there actually a change in strategy here or -- and how should we think about the OpEx? If you are already using your focus on the Tier 2, then should we expect some decline in OpEx? Or is it more of greater focus on Tier 1 and, therefore, we should expect higher level of OPEX going forward?

I think the issue here really is we didn't -- I think our engagement with the Tier 1's is up significantly, and it is really a result of the spending that has been in place for a couple of years. It is something we really had to earn the chance to get back in. So the level at which we have been spending, it has just taken us time to make sure we get in front of these things. And I think the engagements that we have now are really consistent with that spend. So it won't change. It has really not changed up or down. I think we are going to keep going at this pace because now, with this kind of engagement, this sustained level of spend is going to be important while we continue to penetrate. So I hope you can understand that part.

Got it. Thank you. That's helpful. And my last question is in regards to Korea. You mentioned the win with one particular Korean OEM. And if I recall correctly, on the last call you had mentioned that in the first half of 2012 your revenues from Korean OEMs were close to $10 million per quarter. And if I think about the spending factor and Samsung had to spend like 50% of the CapEx in fourth quarter, and there was a lot of spending by hynix as well just based on the public commentary. So if I just think about it conceptually, I would imagine that the Korean OEM business should be really strong for you and probably back to the levels that you had in first half of 2012. So if you can just help us understand, is the business back to that level? Or, if it is not, then what is the reason it is not?

Yes. It is almost exactly at those levels, actually.

Got it. Thank you very much. That's all I have.

Mr. Schwartz, there are no further questions at this time. I will turn the conference back to you.

Okay. Well, thank you, everyone, for your interest in Brooks, and we look forward to speaking with you when we report results from our second quarter. Thanks very much.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.