Azenta Inc (AZTA) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation second-quarter financial results conference call. (Operator Instructions). As a reminder, this conference is being recorded Thursday, April 30, 2015.

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

Thank you, Grant, and good afternoon, everyone. We would like to welcome each of you to the second-quarter financial results conference call for the Brooks fiscal year 2015. We will be covering the results of the second quarter ended on March 31, and then we will provide an outlook for the third fiscal quarter ending June 30 of this year.

A press release was issued after the close of the markets today and is available at our Investor Relations page of our website, www.brooks.com, as are the illustrated PowerPoint slides that will be used during the prepared comments during the 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 on the aforementioned PowerPoint presentation on our website, and our various filings with the SEC, including the Form 10-K for the fourth quarter ended September 30, 2014. We make no obligation to update these statements should future financial data or events occur that differ from the 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 GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Brooks business. Non-GAAP measures should not be relied upon due to -- upon the exclusion of the GAAP measures themselves.

On the call with me today is our Chief Executive Officer, Steve Schwartz. We will open with his remarks on the business environment and our second-quarter highlights, then we will 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 the fiscal year 2015. We will then take your questions. And during these prepared remarks, we will from time to time make reference to the slides I mentioned, available to everyone on the Investor Relations page of our Brooks website.

With that, I would like to turn the call over now to our CEO, Mr. Steve Schwartz.

Thank you, Lindon. Good afternoon, everyone, and thank you for joining our call. We're glad to have the opportunity to report the results of the second quarter of our 2015 fiscal year. Over the past years, you have seen us make investments in growth market opportunities. In vacuum automation and automated systems, we are benefiting from the share gains we have earned because of the boom in deposition and etch process steps. We have captured more than two dozen design wins for back-end and advanced packaging automation applications, which are now beginning to bear fruit.

We identified and invested in another new growth segment in the automated wafer and reticle carrier cleaners and reticle storage systems, a market that is ramping as line widths shrink below 20-nanometer. And we have established a position in life sciences which utilizes our core technology strengths of automation and cryogenics. We will capitalize on the market opportunities of that business and continue to launch new products. We have crafted this product, market, and technology portfolio by design to focus resources on high-growth opportunities.

In the March quarter, we were able to see the results of these investments on all fronts, as Q2 was a robust quarter in terms of revenue and earnings growth. Almost all segments of the business contributed above Q1. Only our services business, which delivered record profitability in Q1, came in slightly lower.

All-in, revenue was $139 million, up 14% quarter-over-quarter, mostly led by expansion from semiconductor front-end demand. Our life sciences business grew by 5%, even as we took actions to reduce costs and restructure the business around efficiency and consolidation of assets. Bookings in March were $135 million, up 5% from December, and consistent with our forecast for a solid June quarter.

Q2 was a particularly strong quarter for our semiconductor and related businesses. We saw significant growth in our product solutions business that came from both automation and cryogenic vacuum products. Total BPS revenue was up 19% from Q1.

By market segment, we saw semi front-end up 23% in the quarter, and back-end and advanced packaging was up 30%. Overall, our automation business was very robust. Our strong position with Tier 1 OEMs for deposition and etch drove our vacuum robots business to yet another record quarter.

Most of the outperformance came from growth from shipments for existing customer platforms, but we also began to ship in volume on two new Tier 1 OEM product platforms: one for a new CBD system, and one for a legacy platform which was converted to our vacuum robot from their own, internally designed and manufactured robot. We've previously announced both of these design wins, but in Q2 we saw the first volume shipments for production units. We continue to pursue these new and conversion opportunities with great success.

Our vacuum systems revenue jumped up 41% in the quarter, as we are seeing some increase from our Korean OEM customers, and we see continued strength in the June quarter. We saw more than 35% increase in atmospheric systems, driven by back-end advanced packaging demand, returning our back-end business to an approximately $25 million annual run rate, about where we were a year ago.

We remain very positive on the prospects for this sector, as the customer platforms fit perfectly with our business model, where we adapt our automation to their specific needs. And their volumes are good for us, but not large enough for them to move in-house.

Similar to the last few quarters, the contribution from atmospheric robots was about flat and consistent with our sustaining position on this product line.

In terms of market segments, we recognized a 37% increase in fab solutions driven by some of our oldest and some of our newest products, as we continue to see significant 200 millimeter product demand for MEMS and sensor applications, and we recognize revenue for some tools placed for 10-nanometer product qualification.

We delivered another good quarter in our contamination control solutions business. We're beginning to realize the growth potential as customers drive technologies below 20-nanometer line widths. Revenue for CCS was $9 million, up 25% from Q1. Based on customer activity and the $10.5 million in bookings we received in the quarter, we remain confident that CCS will be at least a $40 million business for us this year.

Again, the makers of logic chips are the biggest users of our automated FOUP cleaners, but memory makers are also beginning to show significant interest and need for this technology as well.

Our cryogenic vacuum products also delivered strong growth in the quarter, increasing by 13% from Q1. CryoPump revenue was up almost 8%, driven by a 20% surge in ion implantation. Revenue for our Polycold mixed gas cryochillers increased by 30% in the quarter, which is consistent with seasonal patterns we observe related to the demand for active displays for mobile devices. We anticipate continued strength from cryo vacuum products into Q3.

Beyond semi vacuum applications, we continue to expand our cryo technology capability into other applications. In the quarter we saw a significant uptick in large refrigerator application for our cold chuck. We have also leveraged this large refrigerator technology to develop the ability to pump xenon. We've shipped xenon pumps to customers in China, and we're working with another customer in the UK for a similar application.

As an aside, but an important consideration, in the quarter we also completed our testing of the Polycold MaxCool cryochiller as a refrigeration source for our large capacity Twinbank BioStore system. The adaptation of our own technology into our life sciences products gives us a reliable cryogenic cooling source, and meaningfully reduces the cost of goods on our Twinbank systems.

It's this type of synergy that we continue to leverage for the benefit of our entire product portfolio. The first of these MaxCool-powered systems will ship to a Scandinavian customer this summer.

I will now turn to life sciences. First, I'll give an update on the actions we described to you last quarter, followed by a summary of performance for the quarter. And then I'd like to give a brief preview of our new product launch and the exciting opportunity that it brings to Brooks.

As I mentioned on our last call, we had embarked on a significant restructuring of our life sciences business, both to rationalize our global footprint and to create a physical structure that more efficiently supports the go-forward business. We are consolidating all of our large stores for compounds and biosamples into our Manchester, UK site.

Manchester will be our center of excellence for a large store of products where we will leverage an experienced team of very capable engineers and manage the outsourced manufacturing of the major system modules.

The resulting large stores business will have a much more efficient footprint and will not have constraints on growth because of facility limitations, as modules will be fully tested at our suppliers, and final systems will be assembled and verified at the customer locations.

As a result, we plan to significantly downsize our current site in Spokane, Washington, and Poway, California, by the end of September. We will retain some essential engineering and customer service personnel at these two locations. But most of the prior operations will be stopped, and all manufacturing at these sites will be discontinued and transferred to Manchester and here in Chelmsford.

Additionally, our next-generation cryogenic storage and workflow product activity will be centered in Chelmsford, as this is already the site of product development for the BioStore cryo system, which we announced this week.

This reorganization of the division makes us much leaner and more efficient. It allows us to shorten the time required for faster market moves, reduces cost significantly, and leaves us with a size and structure that's more optimal for this business. We anticipate that as a result of these actions we are on track to achieve a $1.5 million per-quarter run rate savings by the end of September, leaving us on much stronger footing.

In addition to the major restructuring activities in the quarter, we also had some notable highlights, including strong performance from our consumables business, where once again the FluidX team achieved an all-time record for sales, and the remainder of our consumables and instruments business was strong. Additionally, we completed the sign-off of the remainder of the eight large stores we installed at the UK Biocentre, and we have recognized all revenue and costs for those installations.

Bookings in the quarter were $14 million; respectable, yet shy of our expectations, as we did not win a specific opportunity for a rather large store order that we had in our forecasts. Although we do not believe that this European contract has been awarded yet, the customer informed us that they have elected to negotiate final terms with one of our competitors at a price that is far below what we think is a reasonable and sustainable for this business.

We are never happy about losing a major piece of business, but we believe very strongly in the value and superiority of our products. And although we have successfully prevailed over most of these attempts by our competitors to buy the business, we are determined not to let short-term pricing tactics alter our long-term business judgment.

We firmly believe that our products and solutions will prove to be worth the value, and that customers will, for the most part, recognize the superior capability that we deliver, and will be willing to pay us more for that advantage that we bring.

As a result of not winning this contract, we now forecast that our life sciences business will be closer to $70 million for the fiscal year, compared to our prior estimates of $80 million. We do have some significant contract opportunities in the pipeline that may close in the next quarter or two, but the timing of those orders will not allow us to recognize revenue in time to hit the $80 million goal.

Although we are always aggressive in going after new business, we do not think that driving to $80 million this year at any cost is worth the long-term damage that could be caused by short-term actions.

That said, we remain confident that our direction, our investments, our product development roadmap, and the ability for us to grow life sciences to the $120 million we've targeted for our fiscal 2017.

Revenue for the quarter came in at $18 million, which is up 38% from the March quarter one year ago, up 5% from Q1, and consistent with our forecasts. Gross margin was 31%, modestly higher than Q1, but was about as expected with the conclusion of the large UK project; and, unfortunately, brought down by some charges to E&O that resulted from the discontinuation of some low-volume products and from FX headwinds.

These one-timers represented about 500 basis points of margin reduction for BLS in the quarter. So operationally, at least, we believe we had an improvement. We forecast June quarter revenue to be approximately flat, with a gross margin improvement of approximately 500 basis points.

I'd now like to take a moment to describe our most exciting BLS announcement to date. I remind you that the reason we entered the life sciences space was to be able to address the automation need for ultracold sample management systems for biosamples and cell therapy application. And earlier this week we announced the launch of our new BioStore cryosystem, which is an automated, minus 150 degrees temperature storage system that is targeted at biological sample storage customers who have thousands, or tens of thousands, but not millions, of samples to store, but who need to ensure that the samples can be maintained at temperatures below minus 135 degrees, and will be safe from the mishaps that too often occur with manually loaded storage systems.

We're launching a family of three products designed specifically to serve this market, which is in desperate need of automation. The first product is an automated storage system that we co-developed with Chart BioMedical, a division of Chart Industries, the leader in manual liquid nitrogen-cooled storage systems. We have developed a system that is safer for samples, safer for operators, and more dependable from the standpoint of accuracy and selection and storage. In terms of commercial rollout, and our current plans are to deliver 10 of the BioStore cryosystems to customers beginning in July this year.

These early adopters are each signing up to provide data, critical feedback, product enhancement suggestions; and, in some cases, published accounts of scientific studies that result from their use of these new products. These early adopters are leaders from well-known institutions, and we all inform you of as many as we are able once we have secured consent from these institutions. Needless to say, we are very excited about our first products designed to serve this segment.

Additionally, we are launching a transport device called the CryoPod for the secured transport of samples at minus 150 degrees. Working in collaboration with BioCision, a California-based biotech company in which we have an equity investment, we have developed a sample carrier that allows secured transport of biological samples at minus 150 degrees.

The CryoPod is equipped with temperature tracking and logging, alarm and alert mechanisms, and sample data tracking. For those of you who are familiar with semiconductor manufacturing, the analogous concept is that of the semiconductor FOUP, which allows wafer transport between process steps in a pristine, controlled environment.

Similarly, the CryoPod allows transport of samples between steps while they remain at temperatures below the glass transition temperature, which is critical to biological sample integrity, and will improve yield and cell efficacy. We believe that these elements of automation that take human variability out of sample handling portends great promise for the improvement of research and cell therapy treatments.

Finally, we are also introducing an automated bench-top liquid nitrogen charging station that is a walk-away instrument that allows safe and efficient refilling of the liquid nitrogen-charged CryoPod, so that in a matter of minutes a CryoPod will be ready to accept samples and can maintain temperature for more than four hours.

Prior to a system like the CryoPod charging station, operators wearing protective safety gear would spend hours filling primitive, un-instrumented transportation devices. This appliance changes all of that and has the potential to dramatically improve the efficiency and safety of sample handling and retrieval.

This family of products, which is designed to improve the workflow of biosample handling and processing, is truly an innovative breakthrough that we believe will change process flows that have been in place for more than 50 years.

We are unveiling these products next week in Phoenix, Arizona, at the annual meeting of the International Society of Biological and Environmental Repositories, often referred to as ISBER. This is the ideal showcase for our part of the life sciences community, and we expect a very positive response.

We believe the long-term market opportunity for this product family is in excess of $300 million per year. Following our early adopter evaluation period, we plan to begin to recognize revenue for these products beginning in our December quarter.

In terms of our overall business, after many quarters of strong and aggressive investment in OpEx, which includes R&D for new products and cost reduction initiatives, we've begun to scale back with a more streamlined OpEx structure. For a few years we had to spend to get out in front of the needs of our Tier 1 OEMs. Additionally, we've been investing heavily in new products for our life sciences business.

With the launch last year of the Twinbank platform and the completion of our first three products in the minus 150 space, we are confident that we can continue to grow all of our businesses, but with a lower level of R&D spend. Still, we consider even a $50 million run rate for R&D to be significant. It's also adequate for us to be able to sustain our current offerings and to be able to deliver next-generation innovative products for new and existing markets.

In terms of our outlook, we are positive about the outlook for June as we forecast strength in the June quarter, driven by added foundry capacity at the 16-nanometer node and the increased need for automated FOUP cleaners and reticle stockers.

We are confident that the cost reduction steps we have taken in life sciences and the profitability potential of our backlog will allow us to once again raise the gross margin in this business toward the promise that we were delivering only a couple of quarters ago. And we are bullish about the opportunity that exists in the management of samples at ultracold cryogenic temperatures, and we are keen to place our newest systems into key customers for validation during the remainder of 2015.

These actions and our continued management of the business allow us to forecast a meaningful increase in profitability. And we hope to continue the trend of growth and increased [turnings] on the roadmap that we have described for you.

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

Thank you, Steve. Please refer now to the PowerPoint slides available on the Brooks website under our investor-relations tab. I will draw your attention to slide 3, a consolidated view of our operating performance, to start the remarks. Top-line revenue increased 14% sequentially to $139 million, driven by higher revenue in our Brooks Product Solutions and life sciences businesses. Gross margins remain at 34% on a non-GAAP basis.

Revenue growth was the primary driver of the improved EPS performance in the quarter. However, we also had help from both of our recent acquisitions, FluidX and Contamination Control Solutions, which were each accretive on a GAAP and non-GAAP basis in the quarter. We'll cover more on each of our business units in the subsequent charts.

Let's now look at our segment revenue briefly outlined on page 4. Brooks Product Solutions grew 19% sequentially, as we saw growth in each area of automation, Contamination Control Solutions and cryogenic vacuum products. Life sciences revenue grew 5% sequentially, with the most of this from the organic base of consumables and services, while FluidX expanded about $200,000 to $3.8 million of revenue in the quarter.

Our global services business', BGS, sequential decline is primarily currency-driven. Currency impact to Brooks overall is minimized due to a majority of our BPS contracts being written in US dollars out of the US. However, we do feel some impact in the life sciences business, and in particular in our global services business, where most contracts are written in the local currency where the fabs are located.

Let's go deeper into this segment, starting with page 5. Products solutions business sought continued growth. Gross margins increased 100 basis points from the prior quarter on higher volumes. As previously mentioned, growth in the quarter was driven by sales in automation, Contamination Control Solutions, and the cryogenic product set.

As Steve explained, we have seen continued healthy growth in the front-end manufacturing customers, as well as the anticipated rebound in the back-end manufacturing.

Also notable is our CCS business, which turned in $9 million of revenue. At the gross margin line, the CCS business was just 28% this quarter, reflecting a lower mix and some early qualification tool costs for a new customer. However, this business drove an FX benefit, as we do most of contracts in US dollars out of our German-based business. In total, CCS was accretive to net income on both a GAAP and non-GAAP basis. We continue to be very pleased with this business, which we acquired exactly one year ago today.

Turning to page 6. Our global services revenue declined 2% from the prior quarter driven by foreign exchange translation. Gross margins were at 32% on weaker mix of repair services, which carried higher materials cost.

Turning to page 7. Life sciences revenue grew 5% from the prior period. The primary driver of the expansion was in the base consumables and services revenue. The FluidX business provided $3.8 million in revenue, an increase of 4% compared to the first quarter. It was also accretive on a GAAP and non-GAAP basis in the quarter, as I have mentioned. Adjusted gross margins remain low.

As I described last quarter, we were facing unusual premium labor and freight costs on a large project which we anticipated would continue to depress margin some in the second quarter. We did see modest improvement in the systems margins. But we reserved approximately $600,000 of inventory, much of which was related to product lines we will discontinue in the consolidation of our site operations.

We expect further improvement in gross margins in the third quarter as the primary project driving the cost overrun is behind us, and the restructuring actions will just begin to take effect.

As Steve highlighted, we did book $14 million of new business in life sciences. The total backlog is now $47 million, while the 12-month backlog is at $35 million.

On slide 8, you can see the dynamics driving earnings per share results this quarter. The numbers reflect approximately 35% of gross margin drop-through on the incremental revenue. This is typically higher, but it was mitigated this quarter with life sciences inventory reserves and lower global services margins.

Special charges this quarter are for restructuring as we continue on our path to reduce redundancies in workforce and facilities. Other income, which is a benefit of $1.3 million, includes net gains from foreign exchange, as I mentioned in the CCS business earlier.

Our tax line returned to a more normal dynamic this quarter, driving an expense instead of credit. The effective to GAAP tax rate in the quarter was approximately 36%. As a reminder, we have a nominal amount of cash taxes paid due to the use of deferred tax assets.

Let's turn to slide 9 to see the cash performance. Operating cash flow for the second quarter of fiscal 2015 was $2 million, which was adversely affected by the increased shipments at quarter-end, leaving accounts receivables higher on the books.

We used $7 million for dividend payments in the quarter and provided our second tranche of $2.5 million in funding to BioCision in exchange for a convertible note.

At the end of the quarter, our balance sheet shows a balance of cash, cash equivalents, and marketable securities of $207 million. The balance sheet remains quite strong.

Slide 10 displays that balance sheet summary. As referenced, working capital increased on the back of accounts receivable. Inventory was reduced an additional $4 million, and reflects further progress in our execution model. The strength of the balance sheet provides significant flexibility to pursue strategic investments still in the future.

Now turning to slide 11, we provide our guidance estimates for the third fiscal quarter of 2015. Revenue is expected to be in the range of $136 million to $142 million, and our non-GAAP earnings per share is expected to be in the range of $0.08 to $0.12 per share.

That completes our prepared remarks. I will now turn the call back over to Grant to take questions from the telephone lines.

(Operator Instructions). Edwin Mok, Needham.

Congrats, all. Good quarter and good guidance. So, first question, I just want to focus on your front-end semi-cap business and your commentary around that. We have heard some of your customer and peers within the sector talk about that market. And I think in general it was -- the commentary was, on average, flattish sequentially going through the coming quarter. But you seem more confident or more bullish on that and you mentioned strength in the foundry area.

Can you give us some color around that? Is that the market that you believe is helping you to drive growth in the June quarter? Was it that some of these share gain that you have mentioned in that area that is driving the growth?

I think it's -- we guide basically flat for the quarter. We see strength and all of the segments. We see continued strength in the back-end and in the front-end in particular. We do have a pretty strong position in dep etch. And in addition to the growth in the segment -- and others have reported already. In addition to growth in the segment, we also have been gaining some share because of legacy platforms that we mentioned. So unusually, without a market growth, per se, there are still market opportunities for growth for us because of the segments that we are in.

And the other thing we see is a pretty strong ramp coming now in the FOUP cleaners. So, it's most of the segments in the business continued to be relatively strong, but overall guidance for us is approximately flat. But we do see good strength in all of the segments where we participate.

I see, okay. So, that's helpful, actually. Just talk about the FOUP cleaner or the CCS business. You mentioned that historically you have seen that more come from larger customer base start to see an adoption or interest from the memory customer.

Is that something that could potentially be a driver this year? Or is this something that we should expect to see some level of [SAM] expansion as those customers start to buy FOUPs and [cog]? If you can give us an idea of the time frame you think that could potentially happen.

So, Edwin, we're starting to get some increased activity for the logic and foundry. So we feel the orders starting to come there. From a memory standpoint, they've been satisfied historically with manual FOUP cleaners and with some products that don't possess all the capabilities that come with our high-end product. And we see that some of the applications, they are beginning to run into maybe some technical limitations. So we're pursuing those pretty hard. But the fact that we're getting evaluations around the memory space give us some indication that perhaps the specifications there are changing.

Okay, great. That's helpful. On the life science area, you talk about one of the contract, the pricing was a little aggressive on the competitor side. I'm just curious, do you think that that could be a pricing risk in the marketplace in where you guys serve? Because as you guys offer these products, competitors try to come in with lower price.

And then, even with the [$17 million] that suggests shipment has ramped up in the back half of the year, are you -- but your booking, your book-to-bill was pretty low this quarter. So are you expecting to just ship from your backlog?

Yes, Edwin. You asked a few questions there. One, we've had pricing pressure all the time. I think because we've been winning a pretty high percentage of the large stores, it's probably not an unexpected reaction that somebody would -- who really had to have the business, would do something that's below where we'd go.

So it's -- we've been winning in the face of price pressure all along because we think the products are better. We still think the products are better. And although anything could happen, we stand by our products and the value that we bring. So we'll see how it plays out. We're not panicked about it, but we don't like to lose a good opportunity like that. We will continue to put good products out there at a good price. We think it's going to be a good business.

Yes, we booked $14 million. We had revenue of about $18 million. That's a little bit backward. We burned a little bit of backlog. But we still have considerable backlog and the ability to continue to make the back half of the year.

Okay. One last thing and I'll go away. In terms of gross margin, I think, Lindon, you mentioned that FX was a contributing factor for weak gross margin in the service business. To the extent that -- obviously we're not printing currency here -- but assuming the US dollar doesn't change or the FX rate doesn't change, is this the new level of margins that we should think about for the services business?

Not entirely. Because as I mentioned, there was some mix involved as well. So we would expect us to come back. Edwin, I've also said before that once I get to above 35%, in the past it was stretching what we thought the economics of the services business could support at the high end of mix. So I think I would expect somewhere between 33% and 36%, in that range, for it to move back and forth.

Great. That's all I have. I'll let the other guys ask. Thank you.

Ben Rose, Battle Road.

Prior to the announcement this week of AMAT and Tokyo Electron calling off their merger, there was a concern that some companies that had done business with both separately might be consolidated as a result of the merger.

Steve, could you talk about your perspective on the merger, longer going through, and what it might mean for the industry, and for Brooks in particular?

Yes, sure, Ben. And we're going to wait to see how that shakes out, as well. But even from the -- before the time the deal was announced, obviously we worked really hard for both of those customers. And actually the behaviors that they had toward us and the things that we did for them during the last 18 months were unrelated to any deal. We aggressively went after the technical things that we had to do to win business. We made progress with both companies and we're really proud of that. So we increased the strength of our position with both of them.

In terms of what happens now from a fallout standpoint, it's really not clear to us because once we win a platform, we hope that we hang onto it. And so we've been aggressive; we've built the business with both of them. We will continue to do the same kinds of things.

And, frankly, we were not given any indications about what the implications might have been once the two companies came together. I think they were very good and very careful about that. So, we didn't have any advance indication of what changes might have been coming.

Okay, great. And it sounds like some of the challenges with regard to the UK Biocentre implementation are now behind the Company. Are you pretty confident in that installation serving as a reference site for Brooks?

We are. We had challenges on the cost standpoint, but that products are great. I actually was there at the opening ceremony last week, with dignitaries and 100 potential customers, and they showcased it. They featured Brooks. They were really gracious. And they made sure that we were front and center and present. And I think they are also very proud of the job that we've done. So those are great tools at a great installation. It will be a tremendous reference site, and I've been witness to it already, on the 21st last week.

Okay, great. Thanks very much, and congratulations on the quarter.

Thank you.

Thank you, Ben.

Patrick Ho, Stifel Nicolaus.

Steve, maybe first off as a follow-up to the Contamination Control business. Some of the activity that you are starting to see on the memory side of things, given some of the industry transitions we're both seeing in DRAM and NAND Flash, is there a bias to one segment of the memory that you are seeing this increased activity?

Patrick, actually to be frank, we can't distinguish. We know the customers. Certainly it is NAND-related, but that's about all we know right now.

Okay, fair enough. Going to the life sciences side for second. With these new products coming out, the small sample storage systems that you've talked about for some time -- obviously excluding the restructuring and the efforts you are doing to streamline the operations in that business, how do you see that aspect playing in terms of margins? Because typically new products have a learning curve ramp. They tend to be lower margins initially. How do you balance some of the gains that you are trying to make on the operations front with new products that are coming out?

That's a good question. We've done a lot of work. We think we're in a position where we understand the costs extremely well. We think from a pricing standpoint it has yet to be determined. Because, again, we're rolling the products out right now. But early indications lead us to believe that it will be at least consistent with the business we've laid out for life sciences in general. And then as we continue to add features and capability, we think we'll be able to push margins even higher.

But we are confident about the early enthusiasm for the product. And we will absolutely be clear with everybody how those products are rolling out. But we think it's going to be pretty consistent with the objectives we put out in the 40%, 45% range. And obviously we'll hope to do better as we have more learning with these products.

Great. And final question for me. On your FluidX business, it appears to be tracking better than expectations over the last few quarters since you acquired it. I know as part of the rationale behind the deal was to leverage your sales force and your team to broadly more distribute their products. Is that part of the reason why it's been tracking better than expected? Or has basically the core team that you acquired -- has it just done better than you anticipated to this point?

One of the things we knew was that if we could put more touch points out, more sales resources out, that they had a better chance. We had a very strong European model that we started to employ now more [than] North America. And I think the benefits of -- so, it's more attention, more sales capabilities helping to drive the top line there. The things that we'll see as a result of combining the FluidX offering with our cold stores is coming. So we have some indications that we'll likely be able to win some more business as a result of having FluidX in part of our portfolio. But the early returns that you are seeing, if you will, are a result of building out more North American capability, for example.

Great. Thank you very much.

(Operator Instructions). Atif Malik, Citi.

This is Amanda Scarnati for Atif. Just a question on the semiconductor side. Are you seeing any indirect impact, or any direct impact, from the equipment reused rates going up at TSMC and Intel?

If we see that it's indirect, Amanda, and it we wouldn't necessarily know. From a reuse standpoint, we ship our automation products and cryogenic products mostly for new tools. So it would be tough for us to know from a reuse standpoint. On the lower end of the scale, on the 200 millimeter business, if they ever acquired 200 millimeter product that did not have a standard mechanical interface, the Smith interface, and they bought load ports, for example, from us. Those would be tools that we would reuse from 200 millimeter that we might automate. But it would be tough for us to tell on current 300 millimeter products what the impact would be from a reuse standpoint.

Okay, thanks. And then the second question on the life sciences business. With the backlog at about $47 million, how should we think about revenue linearity to get to the $700 million estimated for 2015? Or $70 million, I'm sorry.

I'm glad you corrected that; $70 million. So, the backlog is built up around systems and services and a little bit in the consumables instruments. And so, we have really good headlights into systems revenue through the backlog. Services, we sell a lot as we move along, and some of that is in general service and the repair, but also some of it is in upgrades that our team does. And so that doesn't all come out of backlog through the next couple of quarters. And then the consumables and instruments is similar. We sell a lot in the quarter, orders week-to-week from customers, but it tends to be a steadier stream. So it doesn't depend as much on backlog to keep it steady.

We have seen variations of, say, $1 million or more in a quarter, up and down. But in general, it's a more reliable, steady stream. In total, we are relying on the backlog much for the balance of the year on systems. And then we see a fairly normal rate of backlog and dependency on sales in the other elements of the business.

Great. Thank you.

Farhan Ahmad, Credit Suisse.

My first question is regarding the gross margins. If I look at your annual revenues for the March quarter, they were up a good 11%. Yet your gross margins are down 200 bps. I just wanted to ask you, what is the reason that the gross margins are down on a year-on-year basis? And how should we think about gross margin progressing from here?

Yes, it's a very fair question. One, just reflecting on the trends as we've seen, we've been running a fair amount lower in the life sciences business, and that has been weighing on us this past two quarters. We have also, in this particular quarter, you've seen us running lower on the global services. So, the combination of those two by themselves are pretty difficult to offset. And then when you look at the product solutions business, it's not quite as weak. If you went back, we're about within 1 point of where we were running in the first half of last year. And at that level, what you are seeing is a little bit of mix.

And when the business picks up with higher volume, a lot of that volume comes from our largest customers, with the best pricing equations for them. So, this is a little bit of customer mix.

But then we also, as we mentioned, we have just a little headwind in the CCS business as it picked up this quarter, but also carried some early qualification tools.

So, in total -- look, I'm not -- you can add up a lot of different reasons. We look at this, and we say we've got a healthy, healthy business in the BPS business, and we see that the CCS business is -- I'm looking forward now -- CCS business is going to continue to help us expand, because we fully expect this is a lift to our margins at the gross margin level.

We also see a clear path of improvement in life sciences, as Steve alluded to. We have about 5 points of gross margin opportunity ahead of us this year in that business. And our strategic -- I shouldn't even say strategic -- our tactical objective here is to get to 40%, 45% level. We said this next quarter, think about 5 points improvement. And we'll get a little lift back in the BGS space, we expect.

So, Farhan, we really expect that margins improve. But I also have to mix into that that when the business is at its highest point, we do see a lot of it coming from our largest customers that do have a fairly demanding pricing equation.

Got it. And then, Steve, I wanted to probe you a little bit on the life sciences business. You mentioned that on one of the products that you were expecting to win an order, and you lost it to a competitor this quarter because of very low pricing from the competitor. And I just wanted to understand, could this be a problem going forward? And just that the competition increases so much that, going forward, pricing could deteriorate in the market?

Yes, Farhan, it could happen. We've seen low pricing before. But I think they are generally a rational company, so it's a little bit of a surprise to us. We thought this was one we were going to win. We're not anticipating that this will be the norm, because it's pretty destructive behavior. But we just never know. So, we don't think so. We will pay close attention to it.

We're still winning most of the business, and so now one out of the four stores this year we didn't win. So, it's not good; it's a big order. And I don't know what the motivations were this time that changed the behavior to be even that more aggressive. And actually, the customer decision I think is -- of course, we don't think it's the right customer decision, but I can't comment yet.

Got it. That's all I had. Thank you.

And there are no further questions at this time.

I will now turn the presentation back to the main speaker.

Okay. Well, thank you, everyone. We appreciate your interest in Brooks, and we do look forward to a chance to speak with you next quarter when we report Q3. Thank you.

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