Brooks Automation, Inc.
Q4 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Fourth Quarter and Fiscal Year 2017 Financial Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded, Thursday, November 9, 2017. I would now like to turn the call over to Lindon Robertson, Executive Vice President and Chief Financial Officer for Brooks Automation. Please go ahead, sir.

[Lindon Robertson:]

Thank you, Nelson, and good afternoon, everyone. We would like to welcome each of you to the fourth quarter financial results conference call for the Brooks fiscal year 2017. We will be covering the results of the fourth quarter and fiscal year ended on September 30, and then we will provide an outlook for the first fiscal quarter of 2018 ending December 31, 2017, and we'll provide an update to our target model for 2019. A press release was issued earlier this morning 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 everyone 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 our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We made 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 to 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 performance highlights and then we'll provide an overview of the fourth quarter and full fiscal year financial results and a summary of our financial outlook for the quarter ending December 31, which is our first quarter of the fiscal year 2018. We will wind up with an update to our 2019 model and then we'll take your questions at the end of those comments. During our prepared remarks, again 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'd like to turn the call over now to our CEO, Mr. Steve Schwartz.

[Steve Schwartz:]

Thank you, Lindon. Good morning, everyone, and thank you for joining our call. We're pleased to report Q1 results from very solid quarter that caps an outstanding fiscal 2017, a yeah which we advanced all our strategic initiatives and one that positions us for even stronger fiscal 2018. One year ago at this time, we said that we're in an inflection point and we expressed our confidence and our ability to deliver substantially improved performance in both a rapidly expanding Life Science market and Semiconductor equipment space. As it turned out, we were right, and we are ready. For the year we grew revenue 24% to $693 million with Semiconductor up 20% and Life Sciences up 38%. Two very strong businesses demonstrating exceptional growth. And today, as we look into 2018, we have much the same sentiments. As we see demand from our core markets lining up to be even strong than last year and we are on with new products that are specifically designed to take their place in our customer's technology and production roadmaps. We see the Life Sciences market providing steady rapid growth for us as the even increasing demand for samples is expanding our opportunity both because of the sure number of samples that are collected and stored but also because more and more customers are looking for help from a supplier who can give them a workable solution, so the efficient and precise management of these vast and valuable collections. A collection of samples is not new but the means by which these samples are managed is undergoing a dramatic shift, because the value of the sample is now more than even dependent upon the preservation of the sample in a cold environment and the data and information that must reliably be attached to each of these samples. On the Semiconductor side, we are benefiting from the wave of mobility, big data, Internet of Thins and AI applications that are pushing leading edge logic devices technologies to 10 nanometer and below. And simultaneously fueling us well and memory demand which currently does not show scientists slowing. On the contrary, the technology drivers remained robust. And if we are to believe our OEM customers, we may be in for a new Semiconductor opportunity that's fueled by an annual wafer fab equipment spending above $40 billion as a norm. This morning, I'll use my comments to expand on how we see ourselves advantage by these megatrends and hopefully give you a senses to why we are optimistic about our position in these industries. I'll give a summary of highlights from our segments beginning with a recap of our Life Sciences business performance. Revenue came it at a very strong $44 million, up 39% from Q4 last year. Organic growth was 25% delivering our fourth consecutive quarter of organic growth of 25% or greater. In our core revenue lines of businesses, storage services, automated stores and consumables and instruments, we demonstrated solid growth. Storage services revenue were $20 million set a new quarterly record was up 40% versus prior year. The automated stores business was also strong coming in above $8 million for the quarter, up 28% versus prior year. Bookings at $11 million for the quarter kept a record order year continuing our strong momentum in this segment. Consumables and instruments revenue increased to $8 million, up $2.2 million or 36% versus prior year as we are beginning to see the traction from some of the some of the additional sales resources that we added earlier in the year. With these relatively stable parts of our business moving steadily along, there are three initiatives that I want to highlight which represent tremendous organic opportunities for us. The development of cryogenic temperature cold-chain solution for immunotherapy applications, the launch of an Informatics software into customers recognize more value from their sample collections and the pursuit of the massive cold-chain opportunity that's rapidly developing in China. And I'll give you brief update on each of these focus areas. We're encouraged by the strength in our cryo system products as we top $2 million in sales for the quarter. Although we are in the early days of what this market can potentially become, we now have 27 customers using more than 60 B3 cryo systems at 30 sites across 12 countries. Cell therapy is a global phenomenon and bringing it to a mainstream reality where required an automated work flow that includes cryogenic temperatures for storage and transportation of samples. We expect that this business will be up and down for a while, but this is what a new technology penetration plan should be alike, and we'll continue in our penetration efforts in 2018. We believe the enormous market potential for our solutions validates our investments and continued persistence in this area. On another of our new product teams, last quarter, we mentioned that we launched a new Informatics platform called BioStudies, an integrated workflow and inventory management solution that allows users to more fully recognize the value of their sample collections by incorporating critical information about not only the location and condition of their samples but also critical annotation that includes information of our sample provenance, temperature history, big data, consensus status and many other important factors. And in September quarter, we significantly advances our Informatics value proposition and three accomplishments are worthy of note. First, we successfully signed off our first BioStudy sample management installation at the U.K. Biocenter. Then we secured a multimillion dollar BioStudies order in a competitive bid process against more than a dozen competitors to provide Informatics software to a large global pharmaceutical company who is looking to connect the distributed sample collection. And in August, we acquired Freezerpro product line. The Freezerpro software in a cloud-based mobile application that allows small and medium size collections to be tracked and managed. This Informatics opportunity is still young, but our offering looks like it hits a very critical segment of this market. These two organic vectors cryo cold chain and Informatics combined to contribute approximately $7 million of revenue in 2017 and those small both represent important growth opportunities for us. We've planned revenues from these offerings in 2018 will still be modest, however we do intent to use the year to position ourselves of a long term by securing more of these high value offerings with market leaders. In one other important development related to opportunity expansion, for some time now, we have had our site set on China and the tremendous potential that will be part of the sample management solutions for some of the largest studies the world will now. I am pleased to announce it in the quarter we captured an important and influential win at a major Beijing based research institution. It bring this for us to deliver three large automated cold stores each with the capacity to store millions of biological samples. This is an addition to 8 BioStore, 3 cryo systems which will be installed at the same institution. This significantly positions Brooks at the heart of what has the potential to be the start of a countrywide research and bio sample network. This partnership requires some investment bias and the first phase will be relatively low margin business. But we believe that this premier bio storage penetration positions us well for subsequent opportunities in China. We're thrilled about this win and we are working diligently with the customer to be able to deliver what's planned to be the first of more than ten bio-banking site in this consortium. As you can sense, we fit uniquely in the center of a global opportunity to change the way that samples are managed. We are recognized as a leader with the only complete sample management solution and we have new business chances at every turn. As we launch into fiscal year 2018, it's useful to reflect on the momentum that we've generated in our Life Sciences business in fiscal 2017. A few of the full year highlights include revenue of $149 million was up 38% of fiscal 2016 and was fueled by organic growth of 27% year-over-year. Bookings of $189 million helped to build backlog by 440 million. Life Sciences operating profit of $7 million represented a positive swing of $11 million. We sustained our appetite for acquisitions as we acquired Cool Lab products from BioCision, PBMMI and Freezerpro. And in the first week of fiscal 2018, we acquired 4titude another nice addition to our consumables business portfolio. We almost doubled our customer list to more than 1,000 active customers, more than 100 of these were account that which we won first time business in the year. And most importantly, we're providing full cold-chain sample management solutions that are accelerating a change in the way that customers manage their collections and where they hold their samples. We've demonstrated the ability to win and deliver more business that gives us confidence about our growth potential. Because even at $150 million in annual revenue, our business is still only just beginning to penetrate a market opportunity which measures in the billions of dollars. We will remain aggressive in our development of the new cryo cold-chain solution, we're positioned to add more capabilities to the company via acquisition and we have a healthy pipeline of excellent candidates. We have a strong cash generation capability, a healthy balance sheet and an appetite to expand both organically and by acquisition. We will be profitable as we grow but we believe that now is the time to secure our portfolio and our share position. We look to 2018 to be another year with quarterly sequential revenue growth and again this year, we forecast growth in Life Sciences above 30% for the full year. Turning now to our Semiconductor business, we're definitely the beneficiaries of not only the strength of the Semiconductor chip market but particularly 3D NAND memory and advanced logic, which are huge consumers of Vacuum Process Technologies. Overall, growth in our Semiconductor business with 20% of the year and that's net of a 6% headwind from the lack of revenue from license income and revenue from the Yaskawa joint venture that we concluded late last year. We doubled operating profit, gained more market share and further strengthened our position in our targeted high growth sectors. For the quarter, our semiconductor business came in just about as we forecasted with continued strength across most of the portfolio them slightly due to a softening in the contamination control business which we'd forecasted. Operationally, gross margins increased sequentially by 180 basis points and we continue building our future by securing more new design wins. We've remained heavily invested in three growth drivers that we believe will fulfill our business. And in 2017, we also benefited from a resurgence in our cryogenic vacuum business. I'll report briefly on each of the segments now starting with vacuum automation. In the vacuum automation business, demand remained robust as vacuum robots revenue with another record level and vacuum automation systems although strong were down slightly in the quarter. Noteworthy in the quarter, we had to more megatrend leap next generation vacuum automation solution wins as we put more space between us our capabilities and those of our competitors. For the year, we secured more than a dozen new design wins with this next generation capability including nine new tool platforms at two of the largest OEMs in the deposition and etch space. To put our strong market position in perspective, in fiscal 2017 compared with full year 2016, we had 45% growth in our vacuum automation revenue. That kind of growth came from our existing customer business expansion and additional market share gains with global market leaders for advanced deposition and etch applications. Next quarter, we estimate that our vacuum automation business will remain strong at approximately the same levels which is consistent with OEM forecast for equipment shipments in the quarter. Advanced packaging has been a steady segment for us in 2017 and despite a modest drop in revenue in the quarter to approximately $13 million. We finished 2017 with $46 million in revenue which was up 13% from 2016. We're already working on new designs that will handle the next generation of complex substrate that we see coming in 2018 and we're positive on our position in this market. Even without a definitive plan for the next PSMC info line, this business remains healthy as all sets and device makers with packaging operations are beginning to adopt the same process tools for their advanced packaging lines. Our market share momentums are good with more than 25 customers across 8 different applications. Our contamination control solutions business came in exactly at our forecasted of $15 million, down about $5 million from the June quarter. Our market position continues to be strong and we gained more share from some new wins in China and Taiwan. And we qualify a set of tooth cleaners for production release at a major IDM, so we are now in volume production at three customers who are running 10 nanometer production. Additionally, we continue to lead the market for a EUV pod cleaning and we further expanded our footprint by winning another EUV radical stocker and in advanced development path. To recap the year, our CCS business was up 63% over 2016 to more than $80 million. We've maintained our very high market share position throughout 2017 and we've won most of the new opportunities that we've competed for. This being a new and necessary technology for leading edge device manufacturing, we anticipate that CCS business will see higher volumes coming as foundry and logic fabs we added most likely in early to mid-calendar 2018, until then our revenue will mostly come from memory in Tier 2 foundries. I do want to make a note about our cryo vacuum franchise. A year ago, we described that PVD and INM plantation the two semiconductor process that they use cryo pumps had been down in 2016 but the 2017 looks to be stronger. Even at that time, we did not have an idea of just how strong these markets would be, but for fiscal 2017, we saw 40% increase in our cryo pump business for semiconductor and a 70% jump in our cryochillers business which is largely tied to the display market. A leading market share positions in this vacuum creation space was already strong but continue to improve in 2107. Revenue increased each quarter through the year taking us to new record level in the fourth quarter and business feels equally strong as we enter the first fiscal quarter of 2018. We had an outstanding year in semi in our strong defensible positions in high growth applications, continue to support our contention that we ought to be able to grow our semi business 2 to 4 points higher than the growth in the wafer fab equipment market in coming years. We continue to invest in each segment to further strengthen our market leadership and secure our position in our customers' next generation plans. Even though December will be another slower quarter for contamination control business, we anticipate growth in the remainder of the semiconductor business and indications that we're receiving from our customers, although we should expect strong momentum at least into the March quarter as well. All in fiscal 2017 was one in which we began to showcase the capabilities we've been building in the transformation of the company. We have two leadership businesses supported by investments to signal our intent to continue to outgrow our market segments. We're taking full advantage of the value compounding effect of outperforming sectors that are themselves outperforming. And we look to exercise our position and capability as we move confidently into 2018. And that includes my formal remarks and I'll turn the call back over to Lindon.

[Lindon Robertson:]

Great. Thank you, Steve. Please refer now to the PowerPoint slides available on the Brooks website under our Investor Relations tab. To start the remarks, I would like to draw your attention to Slide 3, which is a consolidated view of our fourth quarter operating performance. Our top line revenue was flat sequentially to $182 million, driven by 20% increase in Life Sciences and an expected 5% decline in Semiconductor Solutions. On a year-over-year basis, the $182 million of revenue increased 13%, reflecting Life Sciences revenue growth of 39% and Semiconductor Solutions group of 10%. Life Sciences revenue in the quarter amounted to 24% of our company total. In the GAAP results, earnings per share remained at $0.25 even with the third quarter results. This reflects a benefit from higher gross margins and lower taxes, offset largely by higher operating expenses. The EPS of $0.25 is 62% higher on a year-to-year basis compared to the same period of fiscal 2016. Looking at the non-GAAP picture on the right, let's walk down the P&L. The non-GAAP gross margin increased 130 basis points to 41.3%. We saw a modest increase in Life Sciences margins, but the significant improvement was driven by higher margins in the Semiconductor segment. Operating expenses increased $4.3 million, reflecting growth in both segments. The increase in R&D was driven largely by investments in Life Sciences the increase in the SG&A also reflects further investment in Life Sciences including the July acquisition of PBMMI sample storage business and additional hiring for sales and operations. We also saw an increase across our business in commissions, variable compensation and the non-cash expense for long term incentives plans. Down below operating income, the tax line reflects a 13% non-GAAP tax rate for Q4. Our joint venture income came in at $2.1 million in the quarter compared to $2.5 million in the third quarter. This amount is after tax and is realized from our Japan based joint venture UCI which provides cryo vacuum pump products into the OLED capital equipment market. At the bottom line, we produced $25 million of non-GAAP net income, $0.35 per share and $37 million in adjusted EBITDA. As noted on the chart, our adjusted EBITDA has increased 51% year-over-year and is up 2% from the third quarter. The solid improvement seen through 2017 remain with us. Let's turn to Slide 4 to review the full year 2017 performance. In fiscal year 2017, we added $133 million of revenue to our top line of 24% growth, $15 million of this growth came through acquisitions. This includes the recent addition of the PBMMI bio storage business. The Biosystems product line acquired in our first fiscal quarter and a two-month comparison benefit in bio storage technologies, which we had acquired two months into our 2016 fiscal year. To setting aside these and a $3 million direct from currency, our total Brooks business had 22% organic growth in the year. Gross margins expanded 3 point in the year. Recall our restructuring programs driven through 2016 and 2017 in which we removed total of about $23 million of annual run rate cost, some benefited us in 2016 and in 2017 saw the full year benefit. The lower fixed cost structure increased volumes and growth in high value products and services have taken us to record gross margins. We have deployed operating expense investments through acquisitions as well as hiring to support our growth. In total, we achieved a 9% net income margin on the GAAP basis and 13% on the non-GAAP basis. Let's turn to Page 5 to begin discussion of those segment results. In the fourth quarter, the Life Sciences revenue was $44 million which was an increase of 20% sequentially and 39% year-over-year. Within this 39% growth year-over-year, the organic growth was 25% this quarter. Given the notable sequential growth of 20%, let me break that down for you. Compared to the third quarter, bio storage services revenue increased 32% quarter-to-quarter which includes the revenue from the acquisitions and 10% growth from the preexisting bio storage business. The remaining core infrastructure and consumables revenue also grew 11% compared to the third quarter. The total bookings in the fourth quarter for Life Sciences were $35 million bringing the full year bookings total to $189 million, which is up 30% compared to fiscal year 2016. I will take a pause from the chart here to update you on the mix of our Life Science business. The storage services business except for the seasonal nature of the calendar year-end has seen steady sequential growth each quarter since we acquired that 8 quarters ago. Meanwhile, our core infrastructure consumables businesses seen a steady surge of grow all of this year and received another boost from the automated cryo stores revenue which Steve highlighted. The storage services business represented 46% of our revenue in the quarter with the core infrastructure and consumables offering making up the complement. When we strip out the recurring nature of these businesses and combine the consumables and services from infrastructure with the recurring storage services business, the recurring portion of revenue of the Life Science business was approximately 53% for the year. Referring back to the chart, Life Sciences adjusted gross margin in the fourth quarter came in at 38.2%, of a tenth of a point from the prior quarter. The storage services business came in approximately 1.4 points lower than third quarter impacted by a higher mix of genomic services revenue. And in the core infrastructure consumables business, we saw an improvement in the gross margin of about 8 tons sequentially. We expect the Life Science segment to achieve 39% gross margins in the first fiscal quarter and approximately $47 million to $49 million of revenue. The summary of the full year is a similar profile as the fourth quarter, 38% revenue growth, 27% organic growth and segment profit increase of $11 million year-over-year. Steve has highlighted the hallmark changes in this business. For our expectations going forward, we look forward to another strong year of growth in 2018. With all acquired businesses counted, we see 30% growth or better for the year with margins up 40% for the year. Our confidence is reinforced with a strength the backlog and the recurring revenue base the team has built. Let's turn to the Semiconductor business on Slide 6. Semiconductor Solutions revenue decline 5%. As anticipated contamination control solutions provided $15 million of revenue and was a principal driver of the decline down approximately $5 million. We had slight softness in automation, largely offset by growth in cryogenic vacuum products and continued growth in our services business. In total we were pleased with final revenue of $138 million which was 10% of the fourth quarter of 2016. Adjusted gross margins improved 1.8% points to 42.3% this quarter resulted in approximately the same gross profit dollars as the previous third quarter. The progress in the quarter reflects a few dynamics. Our manufacturing and services fixed cost base that improved utilization and our mix of revenue was favorable. The operating expense line grew in the quarter. The increase this quarter was primarily driven by the higher variable pay and stock compensation expense explained earlier as well as increased R&D projects. The full year results shown on the right side, reflect the value of our portfolio and the leverage of the fixed cost and expense of the Semiconductor Solutions segment. Revenue growth of 20% was driven on a 4% operating expense increase and supported nearly 4 points of gross margin improvement. The expansion of contamination control with fabs and that of wafer level packaging with many customers drove value into our sales mix. The restructuring actions taken in 2016 and through 2017 also set the stage for the fix cost leverage improvement helping us in total to drive gross margins above 40%. At this revenue level and with operating margins above 16%, we are already operating well above the 2019 target model we proposed one year ago. So let's turn to the balance sheet on Page 7. Looking at the changes in the quarter, most significant is the $31 million increase in goodwill and intangibles driven by the acquisitions in the quarter. Inside working capital, other current liabilities increased to $11 million which includes normal compensation and tax accruals. This was largely offset by the decrease in deferred revenue reflecting progression of our Life Science system projects and customer acceptance as for passion much of contamination control products. On the full year changes, you will see the similar increase for goodwill and intangibles as the largest portion of acquisitions closed in the fourth quarter. The working capital increase of $9 million includes $3 million added from acquisitions. Deferred revenue remains higher at year end than when we started the year, as does current liabilities. Receivables and inventories do show an increase and have supported the growth with improving in efficiency. The receivables day sales outstanding metric improve 4 days this year to 60 days. And inventory turnover improve six tenths of a ton to 4.3 tons. With the increase of income and efficiencies in assets, we achieved in ROIC at 12.9% for the year. And at the end of the year, we finished with $104 million of cash and equivalents on the balance sheet. Let's turn to Slide 8. We finished the year strong with $35 million of operating cash flow in the fourth quarter. In addition to the dynamics I just described to you, I'll highlight that we had 5 million of dividends from our Japan joint venture contributing to the quarter and the full year. The CapEx line reflects $6 million in the quarter which drove the full year to $13 million. We are in our seventh year of paying a dividend returning $7 million to shareholders in this quarter. Cash from operations at $96 million for the year and free cash flow was $84 million. In summary for fiscal 2017, our cash balance has expanded by $13 million to $104 million on this report. This is after paying $45 million an acquisition, $28 million in dividends and $13 million in capital expenditures in the year. After the close of the quarter, we announced the acquisition of 4titude, a manufacturer of scientific consumables for biological sample materials used in a variety of genomic and DNA analytical applications. The purchase price was $66 million in cash, net of cash acquired. Currently with the acquisition, we announced that the company secured a $200 million seven-year senior term loan agreement providing us with additional liquidity in capital for growth. It is important note that interest expense in 2018 is expected to be approximately $9 million in the year or $2.2 million each quarter. Slide 9 addresses the outlook for our first fiscal quarter of 2018. First quarter revenue is expected to be in the range of $182 million to $188 million. Adjusted EBITDA is expected to be $34 million to $38 million. Non-GAAP earnings per share should be at $0.27 to $0.32 per share while GAAP earnings per share is expected to be $0.19 to $0.24. So, now we normally stop our remarks here, but we have seen significant changes to make up of both business segments. The Semiconductor business is already running into the 2019 performance range and in Life Sciences, we have completed three acquisitions in the past four months. So please turn with me to Page 10 for an update to or 2019 target model. The revenue range at the top reflects 7% to 12% growth. This allows for a modest expansion of 2% to 8% compounded annual growth rate in our Semi revenue. If the Semi capital markets flat, we expect to be at the bottom of this range, two to three points better than market. If the market grows 5%, then we expect to see the top end of that range. In Life Sciences, we have modeled approximately 20% organic growth plus the benefits of all the acquisitions made to date including 4titude which closed in October. For gross margins, we expect Semi to sustain the 41% we have seen in recent quarters and expect Life Sciences to operate in the range of 42% to 44%. The expense line provides for approximately 5% continuous annual growth to support 7% to 12% revenue growth in total. As you can see, the leverage is impactful, bringing us to arrange with a midpoint of a $1.65 or approximately 16% growth each year. We mentioned earlier, we have taken out $200 million in debt and this range of EPS reflects carrying interest cost of approximately $0.10 in 2019. We've not included benefits of the future acquisitions here, but we do expect to acquire more, and we look forward to adding to the adjusted EBITDA range on this chart. That concludes our prepared remarks. I'll now turn the call back over to Nelson to take questions from the line.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Farhan Ahmad with Credit Suisse. Please proceed.

[Farhan Ahmad:]

Hi, thanks for taking my questions. Your Life Sciences business has shown a lot of growth recently and you continuing to grow. Can you talk about the synergy going forward between the Life Sciences and your Semi business and does it make sense for the two businesses to exist together company going forward? And how do see the business being evolving?

[Stephen Schwartz:]

Hi, Farhan. Yeah, thanks. This is a really good question is one that we spend a lot of time on. Let me give you a couple from a product and technology standpoint, one of the things that this team is doing, they utilize some of the cryogenic capabilities of the company and they've employed now in two different methods in two different designs for cold storage with a third coming. So we have some overlap remaining from a science and technology standpoint, but I think it's been put to good use and it makes for a much more efficient store and it is really well received by the customers. At the sales level, at the business development level, they are pretty separate businesses. And of course as we've grown both business, we still rely on the cash generation capability of really strong Semi business, they help fund growth in both segments. In time, we will always be open to whatever the best thing is for the shareholders. We still have a small Life Sciences business and we're were adequately both capitalized and able to generate cash to support it. But what we will always be looking that in the future for right now good overlap from a technology standpoint and the freedom to - and the ability to fund the growing Life Science business that this really flourishing we think. So right now, we're content with the position that we have but we will pay close attention to this because we've planned a pretty significant growth here and Life Sciences will continue to gain mass and be a more significant part of the company.

[Farhan Ahmad:]

Got it. And then just one question on the gross margin for Life Sciences, if I go back a couple of quarters, we were expecting the gross margins at the end of the year to be north of 40% but been about 38%, 39% now. Can you just talk about why the gross margins coming in a little bit lighter than what you were expecting a few quarters ago in the life sciences side of it just impact from acquisitions or is there some mix issues?

[Lindon Robertson:]

Yeah, Farhan. It's a really fair question. And I would emphasize upfront that we are expecting the business to run at 40% overall and better in the near term to get to that 42% to 44% range by 2019. In this period, we have seen a couple of things happened. One, we did have a little more mix of genomics related services. So typically in the past two years, we saw a pretty significant spike in the December quarter but in this quarter, we saw an increase in that and it does bring a bit of lower margins. And then I'll also acknowledge that as Steve highlighted, we did decide to make investment in China so to speak in other words the transaction that we decided to do there did bring our margins down slightly on average. We consider this is a very important space for us that while we have been there this was significant mark key win for us and we think it will be a nice platform to grow inside that region. So it brought our margins down slightly and so what you're seeing us in that 38%. Meanwhile I'll also acknowledge that we have opportunity in the cost area around our infrastructure and consumable space and we continue to integrate and with the latest acquisitions, we think will continue to refine that area. So that's why we have confidence with the business overall, we think some growth areas that you're starting to see around as well as some of the improvements that we see will offset the genomic mix and get us above the 40% and beyond.

[Farhan Ahmad:]

Got it. And then one last question on the guidance for the December quarter, you are guiding revenues up, but EPS significantly down, so can you just help us understand what about how do you bridge the EPS?

[Lindon Robertson:]

Yeah. That's a good question. So just if you refer back to the P&L chart, what you'll see is that we do have some impact in the non-operating income. So our tax rate for this past quarter was about 13% and that was a little lower than over the year as we had some discrete levels in this past quarter. But in the quarter coming, we refreshed to the following year. Our guidance on the 20108 year will put us again in the 15% to 20% range. Expectation we have about 18% factored in for the quarter and for the year currently, but it all ranges between 15% to 20%. So that takes us down a little bit. And then we also have lower joint venture income as you saw it soften this past quarter, we're expecting a little more softening in the coming quarter. And then finally and this is I think of important for everyone to recognize, we try to hit is the debt does add some weight to our EPS, in other words about $0.03 in the quarter is the impact of the interest expense. So if you were to factor just the interest expense and which is a change to our model really at least how everybody else is viewing it, you would look for about a $0.03 adjustment, the tax and the joint venture earnings make up the difference.

[Farhan Ahmad:]

Great. Thank you, that's all I have.

[Lindon Robertson:]

Thank you, Farhan. I appreciate your analysis.

[Operator:]

Thank you. Our next question comes from the line of William March with Janney Montgomery Scott. Please proceed.

[William March:]

Hey, guys. How are you?

[Stephen Schwartz:]

Hi, Bill.

[William March:]

So, the first question, could you maybe just talk about the 4titude acquisition and specifically it seems like their products are a little bit more geared towards lab consumables as opposed to what we would think about Brooks's sample storage solutions, so just kind of the strategy behind that and then maybe how does this acquisition open up additional opportunities for M&A maybe in a space adjacent to where you guys have traditionally played?

[Stephen Schwartz:]

Sure, Bill. And this is an interesting one for us because without the capabilities that we acquired in the last couple years, it would be a little tougher fit. We did find in our as we canvassed the area around the cold-chain, a couple things, one, as you know in the BioStorage alliance that we have with RECRD [ph] there is a high volume of both storage and in the use of PCR placed there for analysis and ultimately, we have customers now story PCR, formatted samples in cold storage. So we think it's a really good fit and we look as amount of genomic analysis is accelerating that this format is much more prevalent, and it happens to be mainstream in some of our customers and on the analysis side of our business. So we think it's a really good add from that standpoint and the integration by the way going extremely well. One of the things that note is that it allows us also to expand and put something else in the consumables case for the sales before up selling the FluidX capability. So we can leverage and infrastructure we built the sales organization and we're actually contacting the same customers who buy other services and the infrastructure stores from us. So far really good fit, we like the business a great deal, we'll learn a lot more about it as we go, but we anticipate good synergies on the sales side and certainly from the analysis in storage side as well.

[William March:]

Got it. And then on the B3C, could you maybe just talk about, I guess two questions, one, with the recent CAR-T approvals by the FDA, have you seen an increase in contact with customers? And then secondly just could you maybe just talk about how that infrastructure would fit into a company if they had a CAR-T therapy approved and how many freezers would they need from you guys just kind of how that that opportunity looks over the next couple years?

[Stephen Schwartz:]

Sure. I can after the first part with a little more clarity excuse me than the second part. Because of the CAR-T and the way that these technologies are advancing, the customers almost self-declaring a little bit easier. So they're pretty easy to find and they are numerous as you can imagine. And so that's the bulk of the penetration. I think one of the thing that has done is this focus rather we went up early adopters early on at a broad audience, we're finding that the cryo is really focused on very specifically some of this immunotherapy. So that that's the focus area for the company, we find a good match there and that's why we talk about 30 different sites with the B3C from an adoption standpoint, that's gaining some momentum and we feel really good about that. In terms of the workflow, it won't be simply an automated store, but it will be how do we continue to protect the samples below the glass transition temperature from storage through transport to ultimately where this sample would be used. We think it's an integral part. This will be a long process to get this qualified into process ultimately that could be used for clinical trial. But you can imagine that if B3C system stored 10,000 samples, you can do arithmetic pretty quickly to understand that that would drive a very significant market opportunity for us. So how those would be distributed, would they be a clinics, would they be at a pharmacy, would they be only in a central location ultimately shipped out? It's yet to be determined, but I think I can tell you that a lot of activity going on to how we take some of these technologies and expand the market. But we're working on the workflow, this is front in center right now.

[William March:]

Great. And then one last one just from on the Semi side of the business kind of what gave you the confidence after you had updated fiscal year 2019 guidance a few months ago on the Semi side of things and to raise it only a couple months later, what are you seeing either from end markets or customers that gives you the confidence to raise those numbers so quickly? Thanks, guys.

[Lindon Robertson:]

Yeah. Let me start on that one. So you said a couple months later, but we've been reiterating the guidance but that guidance, that model was established in the summer of 2016. And we have been holding on to that. And as we've said in the past, we don't quite fully subscribe to the fact that the Semi market has shed all of the cyclical nature. We suspect that we're vulnerable to cycles but in light of the confidence that we're seeing in the industry and among our largest customers talking in the indications of the 2018 and likely into 2019 and where we're seeing specific investments in the Semi that would suggest that the CapEx equipment market is running a above $40 billion on a fairly consistent basis. Then we decided to reflect this into the model. And we've been facing the question for a while well you must be thinking Semi is flat or down based on your model and that's not the case. We believe that we are in a market that grows better than GDP. We've seen over the last two years much better than that because of the change in the capital intensity in the market and it appears to us that that capital intensity does have a good case for sustaining itself going forward. And then with all of that said we caution our investors that we do think that there's still cyclical nature at these levels. So that's why we still on the principle of our model show a modest cycle. When we say flat to 5% market for us 2% the 8% revenue growth, we think that's pretty modest, it could be bigger, it could be lower. And the real purpose of our 2019 model is to show you that if we think this is right down the middle of the road in Semi then what does the rest of our transformation continue to do for our earnings potential. And we think that's pretty significant and we think that's meaningful for the investor and we have gain a lot more confidence where the Semi markets rounded out.

[William March:]

Thanks guys.

[Stephen Schwartz:]

Bill, thanks very much.

[Operator:]

Thank you. Our next question comes from the line of Edwin Mok with Needham and Company. Please proceed.

[Edwin Mok:]

Great, guys. Thanks for taking my question. First, I guess once just ask you little bit around the December quarter guidance. From the commentary that's Semi, you expect Semi to be flat, but I think the customer actually some pretty bullish, is that upside for that? And then on the Life Science side, you did the 4titude acquisition, how much of that contribution to the December quarter revenue?

[Stephen Schwartz:]

So Edwin, this is Steve. On the Semi side, with the exception of the contamination control business which is as you know really heavily foundry driven, we have pretty high volume, we anticipate that this is to comeback as it probably in the for the middle of calendar 2018, but the remainder of the Semi business we forecast to be up. So we're very positive on all parts of the business but the increase in the remainder - in the bulk of the Semi business is going to be tempered a little bit by another decrease in the contamination control but overall Semi will be up in the December quarter so maybe they were clear in the prepared remarks from that standpoint.

[Edwin Mok:]

And then on the 4titude benefit effect on the guidance?

[Lindon Robertson:]

Yeah. So let me put just a little more just context on both sides, so we see that there's a possibility of Semi side could be approximately flat, but it could be down slightly and we're managing, we always manage. What the customer takes is there's always a range around. And then on the Life Science side, I gave you a number range of 47 to 49, that's up $3 million to $5 million. And we do factor in a little bit of growth in 4titude but when we have shared that the past 12 months, we saw about $14 million of revenue. So that would imply $3.5 million on a run rate, but frankly we don't factor all of that in the first quarter of an acquisition. I never count on a four-quarter revenue the first quarter I own a business because it's just logical previous owners flushed the pipeline. So we have a little modest growth in there on 4titude. We have some range on it and then we have some organic expansion and recall we had a 4, 3 months of PBMMI, so I don't get any incremental benefit from the 44 just on a quarter-to-quarter basis, but we're really solid on the likelihood of hitting that range 47 or 49.

[Edwin Mok:]

Okay. That's helpful. And then I guess since we saw Life Sciences, I have question around the consumer business, I think you mentioned on the call, it's around $7 million this quarter and have seen decent growth. Have you started to see the synergy benefit from the customer because they are using a cold store and your position in market and have you seen either from your install business or from your BioStorage business that's driving the consumer growth?

[Stephen Schwartz:]

Yeah. It would indeed we see pretty significant synergy benefits. As a matter of fact there's a new configuration of acoustic to this driving a meaningful part of our storage business. So from an order standpoint in future we're in a really strong position. Also we have two large store customers who are customers of the 4titude PCR plate and they store the PCR plates in our store. So we're seeing it is an overwhelming transformation for us to be going to have a conversation with customers on all aspects of the portfolio or especially see it on the order side for consumables and we anticipate in 2018 that the revenue lift will come as a result of the synergy that we have.

[Edwin Mok:]

Yeah, definitely it does, it seems like this is a good a good driver going forward. And last question I have on the margin side, very strong this quarter and if I look at your target model slight you are frankly quite consoled to in terms your margin outlook on for example your gross margin side, you are trending at that and you already guided for your Life Science gross margin go higher and then similarly on the operating margin side I think historically you said Life Science operating margin should be trending up above corporate average, are you guys trying to be conservative there, can you break that down for us a little bit?

[Lindon Robertson:]

Yeah. So it's a really fair question because I put on the page about 41% and I told you that the Semi business would be about 41% and the Life Sciences would be 42% to 44%. At the low end of the range it will still be above 41%. I should say on low end of that Life Science range it will average about 41% and the high end it could be a little bit higher in the mix of the business. Why at 41% on the semi when we just struck 42%? We did have some favorable mix as I highlighted in my prepared remarks in the quarter. We're not shying away from taking this thing upward in fact our segment leader Dave Jarzynka is very focused on driving margin optimization and we've got continued actions on cost as well as value of the product. But we're also cautious on a window like this of two years that we've not been in this territory before, we're quite pleased to be above 40% in over the year are competent that will be above that for it's coming assuming the revenue in the market holds for us. But it'll vary as some on mix, some on the strength of the market and the cycle. So you're fair we're being a little cautious on the semi, it's a sustain model right now on the margins from where we're operating, but still significant improvement from the annual average we just had over the last four quarters.

[Edwin Mok:]

Okay. Great. Just quickly follow-up on the operating margin side, the target for 18% you expect Life Science to be above or below that all any kind of way to think about Life Science and Semi versus the target?

[Stephen Schwartz:]

Yeah. It's a good question and I'll take that on. So in our 2019 a year ago, we told you that 2019 might be the year the Life Science overcomes semi that the time we were calling for 15% Semi objective and Life Scientists a bit higher. Right now, we've adjusted our perspective on this. We think Semi is running above 16% already and on a consistent basis. So we think that we will continue to support that on the semi site assuming we're in the range of revenue. On the Life Sciences, we've backed off a little bit on that. In other words do we think we get this to 15%? Yeah, we expect so but in our model. But I will tell you that as we've come through this year, we've seen opportunities to make investment to grow profitably to expand the foundation for future profitable growth with a lot of confidence and we're seeing that opportunity continues. So our commitment in this model is that we will sustain and improve the operating margins each year, but I don't think 2019 will be the year likely that we crossover absent a significant change in the acquisitions that we do go is going forward.

[Edwin Mok:]

Okay great, that's all I have, appreciate it.

[Operator:]

Thank you. Our next question comes from Patrick Ho with Stifel. Please proceed.

[Brian Chin:]

Hi this is Brian Chin calling in for Patrick. Thanks for letting me ask a few questions. First question just going back to the Semiconductor business, just curious the business tracking around 20% growth year-on-year, if you exclude those headwinds you alluded to the licensing revenue and the wind down at the JV. Just curious what would that Semi revenue growth have been fiscal year over fiscal year?

[Lindon Robertson:]

I think it probably would added about three to four points of growth, in other words estimating it was approximately $20 million in the previous year. And if you would add that back and estimating I'll double check the arithmetic here, but in round numbers, it would have had about a four point drag on the revenue likely.

[Brian Chin:]

Okay. That's helpful. I guess also, when you talk about perhaps there could be some volatility, variability in the Semi business, but as you alluded to relative to two or three years back and certainly six or seven years ago, the business is much stronger, and it looks like it's much more sustainable even if there is variability, it's going to be up much higher level. Just curious to what extent that really is adjusting your strategy in the Life Sciences business. I would think you kind of put you more towards a posture being even more aggressive maybe the term loan agreement is evidence of this. Just hope you can comment little more on that?

[Steve Schwartz:]

I think you have it right. We rather deliver and take action and let you know some of the things, but we see tremendous growth potential. Right now, we have a new organization fitting into what we see is just a global expansion. We have systems this year we signed off in Sweden, in Qatar, in Australia, in Korea, in Japan, we have a really strong global footprint and we're stretching the organization pretty hard. We're adding capability as quickly as we can. As you surmise obviously the debt we took on positions us really well to continue to expand. And our ambitions are pretty significant growth. And we'll signal to you, as we get closer but as we take on more transactions as Lindon mention is one of the reasons we're updating the model right now as we transform the business pretty significantly. And I would anticipate a year from now, we'll have more conversation about new models, especially around the Life Sciences side. Brian, you exactly right, we're positioned to continue to take advantage of what's a tremendous opportunity here.

[Lindon Robertson:]

Brian and I would come back, I already got corrected in the room the revenue in the previous year related to Life Science income as well as the distribution agreement that we accepted in was about a six-point headwind growth rate.

[Brian Chin:]

That's helpful. Maybe one last quick thing, going into the target model that you updated today, in the revenue at the midpoint I think up something like 8% relative to the midpoint of the prior model from over a year ago. I did know it's the higher than EPS range lower one increase the higher of the range state the same inside the midpoint increase, just curious why the higher end of the EPS range did not change?

[Lindon Robertson:]

So Brian, we are a year further along into the model and, so we take a sharper pencil you'll see the ranges on all lines I think narrowed just a bit and this is where we're estimating it today. I want to emphasize another point as we folded in about $0.10 the year for the interest expense and so that was in the previous, so you would see the high end $0.10 higher if we didn't have carry the debt. And as I highly as we expect to put that money to use but we haven't factored in the benefits, it wouldn't be unlikely that we could add, it's certainly EBITDA and non-GAAP EPS to the model to that range.

[Brian Chin:]

Thank you, so much, appreciate it.

[Lindon Robertson:]

Thank you for your analysis.

[Operator:]

[Operator Instructions] Our next question comes from the line of Amanda Scarnati with Citi. Please proceed.

[Amanda Scarnati:]

Hi good morning. Just a question on the new agreement in China and the investments that are required there. Are these sort of one-time investment that have to happen and kind of growth the business overall in China or as you continue to gain more market share and more companies within China, will you use these investments kind of increasing as you go along?

[Steve Schwartz:]

We think this is one very specifically for a target that we feel is really important. There are lot of opportunities we have in China that we made, what we think is a really solid package and agreement with a customer to get ourselves establish firmly. So we think it's one time. We think the next expansion opportunities that come as a result will be more consistent steady business, but we are making some investment both from a configuration standpoint and we might issue our volume that we know we want to make sure that we in and secure. So it's just going to be lower margin at the first part and we think it will reestablishes as soon as we get to the next opportunities that exist there and it will be the reference for us in China. So we think it's got a lot of value finance standpoint as well.

[Amanda Scarnati:]

So are you giving some sort of like pricing concessions in the investment packages you're giving them or is this adding infrastructure for them? Can you talk little bit more about what these investments are?

[Steve Schwartz:]

Yeah, I can't talk too much, but in our ability to get the stores and we are making some configuration changes if you will and so that's a good start for us, happens on the first time of these tools but will be a good thing for us to move going forward.

[Amanda Scarnati:]

Okay. And then as you look at Semi business going forward through 2019, what product line do you look at as kind of the greatest growth potential for Brooks? Are there any product areas that you're little bit concerned about going through 2019?

[Lindon Robertson:]

For us that as long as the vacuum processes continue to dominate that's really important. We see the contamination control as extremely strong. Amanda if there's a question mark its where we go beyond boundaries as very significant consumers of contamination control and will that fanned out into some of the memory and some of the other logic at the same kinds of levels. That's probably an upside opportunity more than anything, but that's an open question that we have. And we're investing pretty significantly in the advance packaging. So we see those three vectors, the vacuum, automation, the contamination control and advance packaging continuing, certainly in time frame of the 2020. We do pay attention to the discontinuity that could happen at EUV, but I remind you we have the EUV business also that's related to the radical management in the pod and pod cleaning. So even if that diminishes slightly the amount of deposition in that because you can do single pattern for example to we can reduce the number of event logic to form the transistor. We have an additional piece of business, we think that will come pretty significantly around EUV. So we think we're positioned properly, we do spend a lot of time with our customers on the next generation of capabilities but as long as the deposition and etch continues to grow like it does, we think we're positioned really well.

[Amanda Scarnati:]

Great, thank you.

[Operator:]

Thank you. Our next question comes from line of Craig Ellis with B. Riley FBR. Please proceed.

[Craig Ellis:]

Yeah, thanks for taking the question and guys congratulations on stellar fiscal 2017 execution across both businesses. I wanted to start following up with your detailed comments on the Semi business Steve, you outlined the strength that you saw across the four parts of that business in fiscal 2017, not looking for guidance here, but can you just talk about growth gives and takes as you look out over 2018 across vacuum, automation, advanced packaging, CCS and cryo vac?

[Steve Schwartz:]

Sure. Craig it's interesting pattern through the year, a lot of people saw growth and one thing that's curious one for us in the vacuum automation, we saw four quarters almost at the same level every quarter. When we had the vacuum robots in the vacuum systems it was strong from the get go. So from Q1 through Q4 and we anticipate the depth that approximately that level is what we would anticipate at least starting 2018. So that's really healthy and we think that's exactly a measure of the deposition add strength and it has more memory, 3D memory gets added, we anticipated that business will continue to be strong. On the advanced packaging this is up and down a little bit more but where TSMC the first of the info lines went in, we had a very significant presence there because we gained share with the participants and we think that the next line that becomes will drive similar amount of business, the advantage we think that we have is because the same suppliers of equipment who use our capabilities are going to supply OSAP and some of the device makers whomever on advance packaging as that capability ramps up beyond TSMC, we anticipate that lot of drive the business, we have less visibility there frankly but we think that's just generally the trend. On the contamination control again, when advance foundries begin to spend that will be strong, we are watching very carefully on the ability to penetrate memory but we right now if you were going get us to take a look at it a strong $80 million a year might look similar in 2018 for right now, just to give you a sense. And as I mentioned on there, chiller cryo pump side, strong into Q4 and Q1 feels similar from and how we are going to start fiscal Q1 2018

[Craig Ellis:]

That's great. And then the next question I have is regarding life science I think the question I get most from investors now is regarding the M&A strategy broadly and specifically there. So what I was hoping you could do Steve is one how can you just step back in from a higher level given the transaction history of the company, talk about where you are in terms of your comfort with deals from a size and pacing standpoint given that we just had three deals and relative to the three life sciences initiatives, that you outlined on the call. Should we think about M&A targeted at those initiatives or is the list of priorities somewhat different in those three initiatives going forward?

[Steve Schwartz:]

Sure. Right now it remains different I'll explained here. We have a complete cold chain I think that's one of things we tried to emphasize from an acquisition of samples standpoint, formatting transport, storage services, and Informatics it's a very complete portfolio and we have an analysis capability now as a result of the bio storage alliance we have with Rutgers. So we really have the ability to manage the samples from a cold chain standpoint. One of the things that the cryo brings to us is the ability to extend the cold chain to another temperature range and participate with a whole different set of applications really related to immunotherapy. So we have a foundation of the business that but applying some of that capability at a different temperature range opens up the next level of opportunity for us, so most of what we have is there because it's a new field it's the development of products that we are bringing to market, that allows us to participate. And so you may see some acquisitions there but mostly that would be organic and as we always mention this is a very fragmented space and the advantages that accrue to us, as being someone who can provide a complete solution we are looking at always like a company like a PBMMI that adds more samples into a model that already exists to an infrastructure that already exists. So as there are things that we can do from a consolidation standpoint where smaller companies fit our model and we could drive both synergies and a little bit more reach we'll be looking at those two. All that said, there are some things that we'll also consider from a transformative standpoint, and we think we have the capacity if that an appropriate accretive opportunity came that we would consider a transformative deal, but right now the kind of things you will see is doing are more along the consolidation of the kinds of capabilities we have but if the Informatics platform could be advanced by a few more capabilities we'd add in rather than develop will do that and if it doesn't make sense we have the development capability to do that on our own.

[Craig Ellis:]

That's really helpful and the last question is to Lindon. Lindon as I look at the target model and your comments around the changes there too it seems like there was not one thing that drove the update on either the life sciences or the semi side, but it was an update driven by developments there and then just change in some of the income statement items like interest expense, Is it that there or was there really a particular driver as you thought about updating the model on this call versus a quarter from now or three months ago?

[Lindon Robertson:]

It really reflects the combination of everything because what we've seen is the semi spaces change significantly in terms of the level of CapEx in the market and our revenue sustainability as well as the number of acquisitions we've added to the life sciences. So if I stick with the old model I keep bridging people back with these differences and changes and whereas that there was time obviously factoring in the interest expense I think is important for people to understand what's happening. So we bring some clarity on that Craig, so I think it's a combination of all of these and I would emphasize that the model while it carries the cost of the debt is not yet carrying the benefit of future acquisitions, we have a nice pipeline in front of us. So we expect to fill that in but it's a combination of all those factors that drove the uptick.

[Craig Ellis:]

Great. Thank you.

[Operator:]

And there are no further question. Mr. Robertson. I'll turn the call back to for any closing remarks.

[Lindon Robertson:]

Okay. Thank you Nelson, and thank you everyone for your time spent with us we have what we believe is a really solid progress and outstanding year of performance we had an outlook that takes us up a bit in the revenue and we will hold our earnings approximately similar when considering the interest cost and then we're pleased to move forward on that basis and also in emphasis the outlook that we have is we build the model out, I mean you seeing the progress over the past year, we see there is much more progress to be made coming 2018 fiscal year going in 2019. And we have a lot of confidence where we're headed, and we thank you for your time and considerations of Brooks Automation. So thank you and we wish everyone the best for the holiday season ahead.

[Operator:]

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