Azenta Inc (AZTA) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Brooks Automation quarter two 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, May 8, 2014.

I would now like to turn the conference over to Mr. Lindon Robertson, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, Jamie, and good afternoon, everybody. We'd like to welcome each of you to the second quarter financial results conference call for Brooks' fiscal 2014 year. We will be covering the results of the second quarter ended on March 31 and will provide an outlook for the third fiscal quarter ending June 30 of this year.

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 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 the GAAP financial results and the 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' Chief Executive Officer, Steve Schwartz. We will open with his remarks on the business environment and our second quarter highlights and then we'll 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 2014. We will then take your questions. During these prepared remarks we will from time to time make reference to the slides available to everyone on the Investor Relations page of the Brooks website.

With that, I turn the call over to Steve Schwartz.

Thank you, Lindon. Good afternoon, everyone, and thank you for joining our call.

Since our last quarterly call we've made much progress in the continued transformation of the Company and I will elaborate on the key milestones in my remarks today. First, a little bit about the March quarter.

We booked $142 million of orders in the quarter powered by a record $34 million of bookings from our life sciences business unit. Revenue was $133 million, up 7% quarter over quarter, with almost all of the increase from a strong showing in front-end semi. We had some key design wins in semi and we continue to establish ourselves in life sciences with an extremely important win that validates our aggressive approach and the value of our new product design.

We generated $27 million of cash from operations and built our cash position to more than $190 million and we still have no bank debt. We anticipate that our cash position will grow again in the June quarter and will leave us in an even strong position to continue to invest in more growth opportunities for the Company.

We also announced some meaningful changes to our product and capability portfolio in the form of the pending divestiture of one non-core business unit, the acquisition of a company in the semiconductor equipment space, and a strategic investment in a life sciences company. We believe that each of these moves will generate significant shareholder value and we are confident that these investments will drive more growth in the coming years.

I'll now discuss some of the specific highlights since our last call and put more color around the strategic moves we have recently announced. Then, before I turn the call back over to Lindon, I'll give some commentary about how we see the next quarter shaping up.

As we mentioned on our last call, we continue to make significant investments in R&D and, as our OEM customer base continues to consolidate, we are focusing even more on the larger OEMs and IC makers. Toward that end we recorded meaningful design wins at two Tier 1 OEMs, both were vacuum wins; one for the Mag 7 and one for our new Mag 9 robot. If these OEM products achieve the same market share as the tools they are meant to replace, each of these platforms are expected to drive demand for hundreds of units per year.

We had two new vacuum system platform wins for new tools at a Korean OEM who is already a customer of our vacuum systems. These two wins were for tools they have developed for new deposition processes.

In adjacent market applications we had one win for a high-capability robot which will be used in a new LED MOCVD system and we won two atmospheric systems for advanced packaging applications.

Additionally, we won a new lot sorter design at a top tier IC maker. I remind you that a majority of the revenue we get from the Crossing automation product lines comes from end users. This is also the same for the new DMS product lines we acquired, so we will have the benefit of leveraging our sales accounts and field service infrastructure as we expand our business with IC makers.

We've reported regularly on our OEM design win activity, but it's important to pause occasionally to reflect on a summation of these quarterly victories. Specifically, I want to call attention to the performance of our vacuum robot franchise, which has been leading the industry for more than 15 years. And although it is established as a workhorse family of products, we have continued to improve performance so that these products meet the cleanliness, reliability and productivity demands of each new device generation.

This persistent innovation and product improvement has led to higher volumes of tool designs at new equipment companies. And because we have invested significantly to be out in front of the demands of our largest OEMs and their customers, we are gaining meaningful share at these accounts as we displace more of their internally-designed and developed vacuum robots. This process and the proofs that are necessary take time and significant R&D spending but we are beginning to see the real results from these close partnering activities and our significant development efforts.

To demonstrate this point, when we compare our vacuum robot revenue in the first half of 2014 with the first half of 2013, we are up more than 100% year over year. And we forecast that our vacuum robot business in 2014 will be up considerably higher than any forecasts for the front-end equipment market growth, an indication of strong market share gains for this important segment.

The continued rebalancing of our product portfolio to focus on products where we add high value, like vacuum robots, remains a strategic priority for us and we believe that we are making great strides in this area. You can expect that we'll be making similar investments in R&D as we've learned, sometimes the hard way, that there is considerable payoff only by being out in front of customer requirements. Now, we are more fully engaged in our customers' next generation product development and we are ready to deliver new products with new capabilities in shorter cycles than ever before.

In this same vein, we will continue to invest in market opportunities where we can both lead and grow. We've been successful by doubling down in market opportunities that take advantage of our core technical capabilities and leverage our existing sales and service infrastructure. At the same time, if we do not believe we have the opportunity to both lead and grow in a market we will take action. It is this portfolio of appraisal process that led to our divestiture of the contract manufacturing business three years ago and, more recently, our decision to sell the Granville-Phillips product line.

In March we announced the sale of our Granville-Phillips business unit to MKS Instruments. Granville-Phillips was acquired by Helix in 1998 and became a part of Brooks when Helix and Brooks merged in 2005. Since that time, GP has been a steady and profitable business. While Granville-Phillips was a part of Brooks our team faithfully maintained these products and did a tremendous job to continue to build the strength of the brand of these outstanding vacuum gauges.

However, we also concluded that even though GP was probably, it was not core to our business. We were the number three provider in the vacuum gauge space and we determined that without additional scale and significant investment it would be difficult for us to grow this business, which has been at approximate the same revenue level for the past five years. We did not have a good path to improve on this position or to make it fit into our growth strategy. We believe that MKS Instruments provides an excellent home for this business and we look forward to the successful closing of this transaction sometime this quarter. Furthermore, it's our intent to use the proceeds from this sale of this valuable asset to invest in other opportunities that are better aligned to our product and business strategy and that will bring better return to our shareholders.

Toward that end, last week we announced the acquisition of Dynamic Microsystems, a very capable automation equipment company specializing in various carrier, cleaning and storage products. For many of you, DMS is a new name but they are well known to IC makers as they have a long legacy of providing many important semiconductor automation products, including reticle stockers, lot sorters and wafer carrier cleaners to mention just a few.

We've been close to DMS for some time and we have witnessed the evolution of their FOUP cleaning products from manual devices into fully-automated FOUP cleans that are rapidly being accepted and utilized for 20 nanometer device production lines. During the period of 2012 through mid-2013 they shipped a total of 3 units; and as they've been able to prove the capability of this system, they shipped more than 20 units in the last 2 quarters, a testament to the acceptance of this critical capability. The 2013 revenue reported for DMS was approximate $28 million. Approximate 70% of the revenue over that period came from their new automated cleaner products and most of that was to top 5 IC makers.

We are positive about the growth prospects for this business in 2015 and beyond as more significant control over air-borne molecular contamination becomes even more critical at and below 20 nanometer. In addition, all trends for future manufacturing requirements, like smaller design rules, 450-millimeter wafers and EUV lithography, further compound the need for cleaner carriers.

We have already begun to integrate the DMS team into Brooks. We have identified approximate $4 million in annual synergies that will be recognized by this time next year. And after a slight hit to our June quarter earnings results we plan to make steady sequential operating profit improvements beginning in September and we believe that this deal will be accretive by mid-2015. We are enthusiastic about the addition of this key product technology because of the strong fit with our semi product roadmap and because it provides it with a new growth opportunity and a market segment where we are already the clear leader.

As you can tell, these are moves leading us toward bigger opportunities that are better aligned with our strategic direction and that also give us a chance to lead in the segments where we participate. We have a stronger and more defensible position in semiconductors and we will keep driving to make the most of this position, especially as the industry forges into the sub-28-nanometer device territory.

Now I would like to give some commentary about life sciences, where we had a truly outstanding quarter as we have gained traction and confidence in our position and the potential that's coming from this new market opportunity.

As I mentioned before, bookings in the life sciences business were $34 million in the quarter; an all-time record. In the quarter we achieved key milestones related to some high-profile biobanks. If you'll recall, one year ago we announced that we had won automated cold stores at Tohoku University in Japan where a population biobank was being established to study the long-term effects of potential health problems associated with the earthquake and tsunami in the Sendai area. We installed these systems in the March quarter and we anticipate that we will reach technical signoff and revenue in the June quarter.

Additionally, we were selected to supply all eight stores for the UK Biocenter, which is an enterprise that is jointly managed by UK Biobank and the University of Oxford. The stores are scheduled to be fully commissioned over the next four quarters and will be supported with a multi-year service contract. We are extremely pleased to have been selected for this high-visibility program which is known around the world. This win is particularly gratifying as the business was quite competitive and we were not one of the two suppliers who were the incumbent storage providers for the original UK Biobank site, which started up some six years ago.

In terms of financials, revenue for the life sciences business was $12.6 million, up approximate 3% from the priority quarter and where we had expected it to be. Gross margin was 41%, down 600 basis points from Q1, but above our corporate average gross margin and within the range of expectation for the life sciences business at these revenue levels. The year-to-date gross margin for the first half of fiscal 2014 is 44%. We've indicated that at an annualized revenue rate of approximate $100 million we would expect gross margin for life sciences to be around 45%. So to be at 41% at half that run rate is consistent with our plans for this business.

In the first two quarters of fiscal 2014 we have booked $54 million of new orders, which is in comparison to the $43 million of revenue that we had for all of fiscal year 2013. Necessarily, we are going to begin to ramp revenue meaningfully in the June quarter and we anticipate revenue will be approximate $19 million. And even though we will continue to invest at a high level for R&D, we expect to be close to breakeven in the quarter. Our target had initially been to be able to breakeven in the life sciences business in the December of 2014 at a revenue of $16 million. While achieving breakeven is important, we are still spending on improvements to current products and new product development in the June and September quarters, but you will see some decrease in life sciences spending beginning in the September quarter and continuing into December.

We are particularly pleased with the momentum we've achieved in the life sciences business. And although we do not expect the $34 million in bookings to repeat again for a while, it is testament to our market position and the potential that exists in this important and rapidly-growing segment. You should expect that we will continue to invest to expand our product portfolio to capture business in more segments of this important cold chain of condition and that this investments will include organic new product development, as well as acquisitions.

Along those lines, I'd like to comment briefly on the equity investment we made in BioCision, an exciting, fast-moving California-based company that have developed some important tools for the protection, controlled cooling and safe transport of cryogenic samples. The BioCision products are innovative and important products that are being written into operating procedures for the handling of samples that require an known and validated cold chain of condition. These products link directly with our mission: to be able to deliver high-quality samples of known history and origins to point of use. We anticipate that our partnership will help both of us to advance these critical handling protocols and qualify equipment for these protocols. We have already started to engage in product development and are formulating plans to help each other in distribution and definition of products that can be used as part of our automated storage and transport offerings.

Before I close, I'd like to mention a bit about the progress that we've made on our operating model. We continue to drive our operating improvements initiatives. But after four consecutive quarters of sequential increase, we did have a slight pause in our positive gross margin trajectory in the March quarter. That noted, we did record a 60-basis-point increase in gross margin in our VPS business, which ahs been the focus area for most of our gross margin initiatives. So, this good work continues apace. However, mix issues and the 600-basis-point reduction quarter on quarter from life sciences took overall company gross margin down slightly. We continue to drive significant gross margin improvement initiatives and we expect to resume our quarterly improvements again in the June quarter.

Also, as we've now started to gain traction in our life sciences business, we are more assured in our plans for a more cost effective structure for this business unit and we are preparing to take actions to restructure some of the footprint and reduce redundancy in this segment. This will allow us to decrease the operating costs associated with this business, but will also cause us to incur some restructuring charges in the June and September quarters as we reconcile our infrastructure and begin to make this business more efficient. Our continued growth in this business will come from organic product development and by acquisition, so it's incumbent upon us to be able to grow and manage the operating costs efficiently.

Now I'll give some additional comments on outlook for the June quarter. We experienced another growth quarter in semi in March but, consistent with other companies that have already reported results, we anticipate that VPS revenues in June will be off by about 15% to 20%. Our service business is projected to be approximately flat. But this quarter we forecast that our life sciences business revenue will increase by approximately 50% and that gain will offset much of the effect of the slowdown in semi.

Additionally, the June quarter results will contain partial quarter contributions from Granville-Phillips and DMS, but we feel that the relative benefit of these moves will begin to be clear when we report our September quarter. Lindon will give some detail as to the anticipated results of these moving pieces.

We've made some important strides in the alignment of our strategy and our capabilities. We are pleased with the milestones we accomplished over the last three months. We are confident in the cash-generating capability of the Company and our ability to grow in the important markets that we serve. 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've created for ourselves.

That concludes my prepared remarks and I'll now turn the call back over to Lindon.

Thank you, Steve. And I refer you to the PowerPoint slides available on the Brooks website.

I draw your attention to slide 3. As Steve referenced, we entered a definitive agreement to sell our Granville-Phillips business and we expect this to close within the third quarter. Consistent with GAAP, we will treat the Granville-Phillips business as discontinued operations in our 10-Q for our report on the second quarter. This treatment is also applied on a pro forma basis in the prior periods used for comparisons. So on this page you can see our second quarter results in two views. The aggregate view at the top combines continuing operations with the discontinued operations of Granville-Phillips so that you may see it compared to your past historical reference and our prior guidance.

When including Granville-Phillips, revenue expanded 7% and exceeded the top end of our revenue guidance range by $3 million for the quarter. The Non-GAAP earnings per share on this aggregate view was $0.08 per share, consistent with the guidance. I will address the performance drivers in a few moments.

In the continuing operations view, you can see the GAAP reported revenue and EPS. In this treatment, the Granville-Phillips business is excluded from the revenue, gross margin and other detail lines of the P&L. However, the net income from the discontinued operations is reflected as a single line item and, therefore, it is in the GAAP-diluted EPS. On this basis, excluding the Granville-Phillips business, revenue expanded 7.5% compared to the first fiscal quarter. For the Non-GAAP view of -- I'm sorry, for the Non-GAAP view of continuing operations we have removed certain charges, including restructuring and amortization, as well as this income from the discontinued operations.

On slide 4 we display the aggregate view of the second quarter results, including Granville-Phillips. In this view revenue expanded 7% compared to the first quarter and exceeded the midpoint of our prior guidance by $5 million.

The adjusted gross profit margin for the quarter was 36.6% compared to 37.2% for the first quarter. The decline was driven by lower margins in life sciences. However, at 40.6%, life sciences was within the range of expectations.

Operating expenses increased as anticipated in the prior guidance, primarily driven by stock compensation and incremental payroll taxes incurred in the first calendar quarter.

Turning to slide 5, Granville-Phillips is broken out in detail for you. At $7.5 million of revenue and $1.2 million of net income, the divestiture removes $0.02 diluted earnings per share from our business. As explained earlier, the income from discontinued operations is included as a single line item in the GAAP results in the right-hand column. For the Non-GAAP view of continuing operations, we removed this income so that you have the appropriate baseline moving forward into the third quarter. We are using this view of continuing operations for the remainder of our presentation.

So turning to slide 6, we summarize the total business performance on the continuing operations basis. You will observe the same performance dynamics as described earlier, but just with slightly different numbers.

Revenue shows an increase of 7.5%. Adjusted gross profit margin in this view declined 40 basis points, driven by the lower life sciences margins as I referenced earlier. The second quarter bubble in SG&A expense includes the incremental stock compensation and the first calendar quarter impact of payroll taxes. And in total, the operating margin percentage held and operating income expanded to $5.8 million in the quarter.

Segment revenue performance on slide 7 shows the strength that the product solutions business drew with $8.3 million of our $8.8 million growth. In total, we grew 8% sequentially and 15% year over year. We were pleased to see each element of our business showing growth this quarter on both comparisons.

On slide 8 we show the results for Brooks product solutions. Total revenue for the second quarter was $90 million, a 10% -- up 10% from the first quarter and a 14% year-over-year increase. We saw double-digit growth in both the semi front and manufacturing in the industrial segment. Gross profit margin was up in the March quarter, coming in at 36% compared to 35.5% in the first quarter. This is 410 basis points higher than the same quarter one year ago. Improvement in the gross margins have come from lower cost of materials and warranty, and also higher absorption of fixed costs for the volumes.

On slide 9, revenue in our Brooks global services segment was up slightly compared to the prior quarter, coming in at $23.4 million. This is a 7% increase year over year. After absorbing the additional stock compensation and payroll taxes and operating expense, this segment reported operating profit of $2.4 million.

On slide 10 you can see the results from our life sciences segment. Revenue grew 3% sequentially to $12.6 million and we had a record quarter for new orders booked at $34 million. The win with the UK Biobank for $15 million was the largest in our history and we believe it to be the largest in the history of the industry.

Consequently, we ended the quarter with $46 million and a 12-month backlog. Adjusted gross profit margin came in at 40.6% compared to 47% during the first quarter. As shared in past calls, we expect life sciences gross margins to be in the range of between 40% to 45% and are pleased with our performance this quarter.

Slide 11 shows GAAP net income for the second quarter of fiscal 2014 of $2 million or $0.03 per diluted share. Excluding amortization of $1.6 million, restructuring of $0.05 million and acquisition costs, Non-GAAP net income was $4.3 million or $0.06 earnings per diluted share.

Our cash position is shown on slide 12. Adjusted EBITDA of $13.1 million and improved working capital of $16 million drove $27 million in operational cash flow. The drop in working capital was driven by advanced collections in our life sciences business. On a year-to-date basis, we have generated $36 million of operating cash flow and have increased our cash position by $19 million to finish the first half with $192 million of cash, cash equivalents and marketable securities.

For clarity, this balance does not yet reflect proceeds from the sale of the Granville-Phillips for $87 million, nor the cash payment of approximate $37 million in the acquisition of DMS.

Slide 13 displays the balance sheet. You can see the assets held for sale of $28 million from the net assets of Granville-Phillips. This was primarily goodwill and inventory. We capitalized $8.5 million in property, plant and equipment as we committed to exercise the purchase option as part of a lease renewal on our -- for a building here on our Chelmsford campus.

As noted in the cash flow, the deferred revenue balance of $33 million reflects the prepayments from life sciences customers and drives the improved working capital. Cash flow was also supported with improved inventory turns of 3.5 compared to 3.3 in the first quarter.

So, let's turn to slide 14. On April 30th we closed the acquisition of DMS and we paid $31 million plus $5.9 million for a primary working capital adjustment. Results of DMS will be reported in the Brooks product solutions segment.

The automated FOUP cleaner complements our automation portfolio nicely and we anticipate a ramp to $40 million of revenue in 2015. We'll see approximate $0.03 earnings per share drag in the third quarter. This will improve by Q4 and we'll begin driving a positive Non-GAAP profit in the first quarter of fiscal year 2015. By 2016 we expect $4 million of cost synergies as we leverage the existing Brooks infrastructure. And by 2017 we foresee an ROIC in the mid to high 20s in this business equation.

This is another transformational shift in our portfolio. Moving out of the stable instruments business for $87 million and into the growth space of clean technology requirements for the fab for a $31 million purchase price. The excess cash will be set aside for further strategic investments.

Turning to slide number 15, we provide our second quarter results on a continuing basis, as well as second quarter including Granville-Phillips. In the right column you will notice that we expect our third quarter of fiscal year 2014 total revenue to be in the range of $115 million to $119 million.

As Steve described, we see a significantly softer quarter in the semi front and manufacturing segment. However, we'll have a robust life sciences quarter, expecting to yield about $19 million of revenue or a 50% sequential growth. We expect our total gross profit margin to sustain the current levels, which reflects improvement in our base business offset with the cost from the DMS acquisition. Non-GAAP EBITDA is expected to be in the range of $7 million to $9 million. Non-GAAP EPS from continuing operations is expected to be in the range of $0.01 to $0.04.

That completes our prepared remarks and I'll now turn the call back over to Jamie for questions.

++ q-and-a

(Operator Instructions). Patrick Ho, Stifel Nicolaus.

Thank you very much. You noted that the DMS acquisition will be accretive in the first half of your fiscal year 2015. What are some of the actions you need to take to get that business to be accretive to the overall business model? Is it just simply restructuring and eliminating some duplicate costs or are there other types of what I would consider major moves, like a manufacturing/ship/product development rationalization that's going to help you get to that accretion level that you're talking about?

Patrick, I think you're really tuned in to what it takes to take on a new business like this. Obviously, the first thing we need is the revenue and so -- but to get the accretive step into the first half, this is about absorbing the business. There is a transition. There's infrastructure in that business that we already have and so we will be eliminating some of that. But we also have some synergies then that will carry us on into 2016, as we said, that will produce about $4 million of benefits to us in sharing our infrastructure; as you said, rationalizing further as we move along. And furthermore, we think that there's synergies between this sales equation and our existing sales equation with the customers that we address.

Patrick, this is Steve. So as Lindon said, there's a lot of field overlap between the sales and service and it looks very much like the infrastructure that's in place to support the [cost] in automation products. And the company already outsources their manufacturing. So whether or not and how we transition those from one contract manufacturer to another, that's not something that needs to be done and that gives -- we have a little bit of time to work through that. So we already have a very efficient model that we like very much, but of course we have a company capability that ultimately might allow us to transition into other CMs that we use.

Great, great. That's helpful. Maybe moving to the life sciences side. You guys really posted a really nice quarter in terms of the orders. Can you just remind us again on the revenue recognition policy as it relates to the Twinbank portfolio? Are revenues recognized upon shipment or are they still dependent on each individual customer's acceptance and signoffs? And when do you think that transition will occur because I'm assuming most of your semis are based off of shipments. When does that kind of policy change on an accounting basis to shipments?

Patrick, that's a great question and that helps explain why you saw only 3% revenue this quarter. This isn't unique to the Twinbank platform. This is unique to a customer contract that we signed and I will just become more explicit. As we referenced about a year ago, we stepped in to a contract with Tohoku in Japan and we highlighted at the beginning of last quarter that we would be working substantively on that contract, and a mix of other businesses -- or other contracts. But some of these contracts, and that one in particular, was on a completed contract basis. And when you do that kind of contract, you take the revenue once you've delivered and satisfied.

But predominantly, most of our contracts we come to terms, industry standard terms, and that usually allows us not to wait for the final steps and we take our revenue on a percentage of completion basis. So this is more of an exception and so that's why you're seeing a slower step and ramp toward that $19 million. We only had $12.6 million. We're happy with that. It's where we expected and we foresaw it coming, but the terms of the contract is what really determines this.

So now, going forward, what should you expect? You should expect that, in general, you're going to have a predominantly percentage-of-completion basis and we're able to show revenue builds with the bookings that you would expect. But it's still going to be a little lumpy depending on which contracts we sign and what those terms are.

Great. That's helpful. And the last question from me, and I think you kind of briefly touched it in your prepared remarks about the service opportunity with life sciences. Now that the systems business is beginning to grow, what are some of the potential opportunities on the consumables, the replacements and the upgrade business within life sciences and how do you plan to grow that over time?

Patrick, we think they're pretty significant. Historically, if we look at any four-quarter period from a revenue standpoint, about half is systems and then there's a mix. About 25% of the business is typically services and then 25% is typically consumables and then smaller devices or things that often we consider to be repeat. So there's half systems and then a very significant opportunity on the consumables side.

And as we've spoken before, we have a lot of focus on how we continue to grow that business. You can imagine that when we sell a cold store with capacity for millions of samples we certainly want to be able to also have the consumables that store those samples inside the cold store. So, we think there are significant opportunities. But that's a pretty typically ratio, if you will; 50% systems and 50% other more granular opportunities and for repeat business.

Great. Thank you very much and congrats.

Thank you.

Ben Pang, Northland Capital Markets.

Thanks for taking my questions. First on the life sciences. As you book some of these larger orders, is there -- are you seeing some pricing? I mean, do you have to give a volume discount? Does that impact the gross margin?

Yes. Ben, I think it's -- although the environment's pretty competitive, we have a very differentiated product. And I think when you see the kind of market share that we're getting, we're winning about all the significant stores opportunities that come up. The product is very differentiated. I mean there's a -- we [are reined] on it a little bit because we can't -- we don't have free rein here, but the pricing is fair. The contracts are competitive but it's weighed certainly on a lot more than price so that's not the pressure point here.

We think we constructed a very different design that meets the flexibility needs for most of these customers who are uncertain about what their future collections will look like. It's not a single format and our stores are capable of storing any number of formats. So when they consolidate a large collection, necessarily they have vials and tubes and jars and containers of different sizes and our store accommodates that better than -- far better than any of the competitive products.

Great. And one question on the BPS. You mentioned the strength in the vacuum robots and the growth year over year. Can you refresh us on what is the share of Brooks versus internally-made robots?

Ben, they're of roughly equal size, just to give you an idea. It's tough for us to know exactly what the share is but we certainly have a majority of the merchant market and we continue to make gains by converting the captive supply into Brooks product. So I don't have a good number, but just to -- it gives you a rough idea.

So if I understand correctly, the non-merchant is equal to the merchant opportunity?

On the vacuum side it's probably close.

Okay, okay. And then the final question is, with the acquisition of DMS, what percentage of the BPS is sold directly to the fabs and not the OEMs?

Ben, one more time. On the DMS products?

Well, you have DMS and I think you mentioned Crossing also sells directly to the fabs, right?

Yes. So a little bit more than half (multiple speakers). A little bit more than half of Crossing. And Ben, we'll give you the DMS number when we have a little bit more DMS revenue, but a majority of the historical DMS revenue has gone directly to the fabs. So we mentioned that 2013 revenue was about $28 million and those products are mostly sold directly to the fab. When we have a little bit more of our revenue history we'll be able to report that more clearly.

Fair enough. Thank you very much.

John Pitzer, Credit Suisse.

Hi. This is Farhan asking a question on behalf of John. My question is on the gross margins for DMS. You're projecting a very significant improvement in gross margins, improving from 25% to 45%. Can you just talk about what are some of the drivers that are leading to an increase in gross margin and what are some of the things that you plan to do to improve the gross margins?

Yes. Thanks for the question. It's a good one to clarify. Really, this is just about absorbing fixed structure as we pick this up with little revenue at the beginning and as we ramp the revenue we're overcoming that fixed cost. The business has been shipping products and taking revenue through the year. And when you pick up a new business from a seller, of course they've shipped what they can and we pick this up and start from here. So that's why, in fact, you'll rarely see us give you any guidance one year away. And so we point out to you fiscal year 2015 we see about $40 million in this equation and about 40% gross profit margins and that's the target that we expect to get to pretty quickly as we step through next year.

So Farhan, to put a finer point on it, the products are a lot closer to 40% today than they are to the 25% on the -- for the shipments.

Got it. So incremental margins are much better because you're -- and you're taking the fixed costs as kind of constant and so you can--.

Right.

Improve the margin. And then in terms of your revenue growth for DMS, what are some of the -- is there any risk to it for FY 2015? What are some of the factors that can cause upside or downside to that expectation?

Farhan, it'll be the fab build outs. So these are tools that go in to support additional capacity so therein lies the risk.

Okay. And what sort of assumptions are you making when you're thinking about a $40 million run rate? Is that like the new fab buildout is at the same rate as today or is it like you're expecting like a -- somewhat like a 10% pick up or is it like doubling of new fab buildout?

So Farhan, if the fab capacity goes so the WFE is of the order of $32 billion, the it's consistent with that being a $40 million business.

Got it. Thank you. And then in terms of your licenses, it was very strong bookings. And now that you have had bookings above your billing rate for a while and you're projecting now your revenue is going up to $19 million in the June quarter, how should we think about it in the back half of this year? Can you get like revenue in excess of $25 million?

Farhan, probably at the -- with the current businesses that we have, that'll be on the high end. But if we're in the $16 million to $20 million range for a couple of quarters, that feels pretty right based on the backlog we have. If incremental business can be pulled in, we could raise that level.

Got it. And just--.

Let me talk about the bookings, by the way. Sometimes we take orders for things that won't ship. When Lindon quoted the backlog, some of the orders that we took are for services revenue, for example, that might be satisfied outside of 12 months.

Got it. And just in terms of -- like you have a very strong growth in the bookings in life sciences and I just want to understand. Is there like a big inflection happening here that's driving the change? Is there something happening on the market that suddenly that industry is migrating towards the products that you are making or is it just like one-time event? Like we are seeing like a very strong increase in the bookings on the life sciences, so just want to understand like in a big picture what are you seeing.

Farhan, there's a -- so I'll do my best here. There's a tremendous growth in the storage of biological samples. That's a known. It's the conversion, if you will, from manual storage and handling for some of these larger collections to automated systems. So even the people who buy automated cold stores, they all have manual storage systems which are liquid nitrogen tanks or mechanical freezers.

But what we see is, as they need more capability from the safety and security of the sample, from automated tracking, handling, monitoring, and as they integrate automation into more of their lab systems, there's a conversion, if you will. During this high growth rate phase there's a conversion to automated systems. Some of these we know about years in advance. Some -- like the Tohoku Biobank was set up very specifically to study a population and that happened basically when the earthquake hit. So three years ago this was put in motion and a store was put into place.

So we see the trend happening where there are more automated systems, but already, and for the last 15 years, there has been a significant growth that would certainly -- that certainly has added a lot of storage capacity. But only now, over the last few years, has more and more of the storage moved to automation and that trend will continue.

Thank you. That's all I have.

(Operator Instructions). Jairam Nathan, Sidoti & Company.

Hi. Thanks for taking my questions. I was wondering if you could shed some light on the adjacent markets, what's the environment looking like there? (Inaudible.) Earlier in the year you had talked about seasonally these things should start picking up starting in the second and June quarter, so I just wanted to see what's your take there.

So Jairam, we had -- I'll just give you a couple of data points and they're small. The backend business was indeed down quarter on quarter. And what we see for the third quarter, for the June quarter, is some recovery, but it's really modest. Our expectations are that by the fourth quarter it'll pick up more significantly. For example, in the LED space, meaningful on a percentage basis, but still small in terms of an incremental growth. So our expectations for Q3 are some recovery, so up off the bottom, but still modest gains on a dollar basis, if you will.

Okay. And my next question, the $34 million in orders, if you take out the UK Biobank you still have a significant chunk, around $20 million. Were there any big pieces there or was it a mix of smaller orders there?

Generally a normal course. So we had some refurbishments. We had another brand new cold store win. The services component, if you will, was significant. But again, in normal course, out of $34 million it was -- just over half was stores and the remainder was services and consumables and small devices.

Okay, thanks. That's all I have.

Thank you. And that does conclude the question-and-answer portion at this time. I'll now turn the conference back over to Mr. Schwartz. Please go ahead, sir.

Thank you, Jamie. And thanks, everyone, for listening to today's conference call. For sure we look forward to seeing you at upcoming conferences and we'll update you on the progress of a third-quarter conference call shortly. Thank you so much.

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