Brooks Automation, Inc.
Q3 2009 Earnings Call Transcript

Published: 7 Aug 2009

[Operator:]

Good afternoon, and welcome to the Brooks Automation earnings conference. Please be aware that today’s conference is being recorded. At this time, I’d like it turn the call over to your speaker today, Mr. Martin Headley, Chief Financial Officer.

[Martin Headley:]

Good afternoon, everybody. I’d like to welcome each of you to the Brooks Automation fiscal 2009 third quarter results call. Our press release and form 10Q were issued just about 4

[Bob Lepofsky:]

Thank you, Martin. Good day, ladies and gentlemen. It is our pleasure to speak with you today about the progress we have made in the last quarter, and the positive trends we have seen and continued to see in our business as we move forward. You will clearly note an upbeat tone to our message today and there are a number of reasons for that. For the first three months of 2009, we were well on our way to implementing the internal restructuring initiatives, that would put us on a path for growth in long-term financial performance. Unfortunately, the collapse of our top line in the March ended quarter eclipse the progress we were making in changing our cost structure and our focus. We promised the model that would have high levels of incremental profit drop through, as business returned to more normalized levels, as legacy issues unique to Brooks such as high legal costs as dated, and as new business development initiatives took hold. You should not read our comments today as comfortable or complacent, particularly as we still print loss numbers and are not yet generating positive cash flows, but you should read us as confident. Confident that we are on the right track; confident that our financial model is delivering the expected results; confident that any upticks in orders will translate into profits for our shareholders; confident that our business development initiatives are aimed in the right direction, and confident that the Brooks people throughout the world are focused on the right things, satisfying customers and positioning us for long-term performance. While, Martin will go into the details of our financials for the June ending quarter in a moment, allow me to give you a few data points that demonstrate our progress. Our revenues in the quarter moved up 17.6% sequentially. Clearly, the levels of business we recorded in the March quarter were not sustainable, and as our major semiconductor OEMs resumed system shipments and factory utilization began to improve, it had an immediate and positive impact on Brooks. Sales to our four largest semiconductor OEMs improved 74% sequentially, indicative more of how bad things were than how good things are. What is very good however is the impact that every dollar of incremental sales, now has on Brooks. On that $6.6 million sales increase, gross profit increased $7.6 million. Our operating loss before special charges was reduced by 36% or $13.4 million. I should note that our operating loss has decreased every month this year since January and the rate of improvement accelerated appreciably in June. Our cash burn in the quarter was cut by 46% as we continued to converge on cash neutrality. Our balance sheet remains strong with about $109 million of cash and marketable securities, we have no debt. We went into the downturn committed to our restructuring plan, our investment plan and an operating plan that would ensure that we would be ready to respond as the market turned or as opportunities developed. We think that commitment is now beginning to pay off. Before I turn to the future, and the impact of that investment plan on our position going forward, let me turn the call back to Martin, who will review the quarter just ended in more detail and give you some insight into our thinking about the quarter ending in September. Martin.

[Martin Headley:]

As I mentioned earlier, we’ve again posted slides to the Brooks website that we believe will be useful in getting a clearer understanding of our results. During my prepared comments, I’ll be making reference to the appropriate slide in that presentation. On slide number three; you can see how we are progressing beyond the March quarter, with both revenue growth and benefits from our significant restructuring activities. As Bob mentioned, revenues grew $6.6 million or 17.6% with strong performance in June. This translated into a $7.7 million improvement in gross profits before special charges, with full quarter benefits from our second quarter cost reductions boosting the normal 40%-plus incremental drop through from additional revenues. R&D spending reduced by $200,000 as the full quarter impact of our enhanced engineering productivity on the Chelmsford campus, offset increased investment in our instrumentation business to bring new products closer to market. Continuing selling, general and administrative expenses were reduced by $2.8 million quarter-over-quarter, and we have much lower equity investigation costs with the residual [indemnification] costs featuring out by the end of the quarter. Overall we narrowed the operating loss, before special charges by $13.4 million progressively over the quarter. The revenue recovery was most significantly driven by increased sales to our largest semiconductor OEMs, as shown by the chart on slide number four, with $4.7 million or 71% of the sequential revenue growth coming from sales to the broader population of semiconductor OEMs. A number of those OEMs have now completely burnt their holdings of Brooks inventory, although certain situations will not be cleared until later in the September quarter. Later in the quarter we also experienced a pick-up in service and spares revenues, and that should translate into growth with much of the rest of our customer base as we move forward. We continue to see very sluggish conditions in industrial markets and you will note, sequential reduction in sales to that market such that, as a percentage of the total revenues they went from 19% in the second quarter to 14% percent in the third quarter. Slide number six; shows how the revenues and operating profits before special charges bridged into our second quarter fiscal 2009 results. The bridge demonstrates strong gross margin contribution from $5.6 million in additional product sales, and $1 million in additional services revenue. The gross margin contribution reflects both, reductions in the fixed cost structure of all of our businesses as well as variable contributions consistent with our business model of contributions in excess of 40%. The impairment of intangible assets in the second quarter translated into a reduction in the $3.5 million in the amortization expense for the third quarter, $2 million of this reduction was reflected through cost of goods sold, and $1.5 million through Selling General and Administrative expenses. As we prepare to bring new instrumentation products to market during 2010, we ramped up R&D spending by $300,000. Continuing operating expenses were reduced by $1.7 million, and I previously referred to the $2.8 million reduction in equity investigation expenses. Overall we saw a $13.4 million narrowing of loses before special charges on the $6.6 million revenue increase. This improvement translates to a $9.5 million improvement in adjusted EBITDA given the reduction in amortization expense. As shown on slide six, we have over the course of two quarters improved the adjusted EBITDA performance by $3 million on approximately $30 million less in quarterly revenues. From a Reg-G perspective, please note as the adjusted EBITDA reconciliations are provided as a supplement to each of our quarterly earnings releases. We have limited impact from special charges on our GAAP net income during the third quarter, and that is identified on slide number seven. Special charges in the quarter were $2.3 million reported as restructuring expenses and $400,000 of asset impairments reported with cost of goods sold. All related to reductions in headcounts and the elimination of a small part of the surplus facilities, capacity within our extended factory business. The second quarter, of course included a number of very significant impairments driven by the timing of the business downturn, and an increase in discount rates. Elsewhere, in the income statement our very modest tax charges were all known cash provisions, and the performance of our joint venture companies in Japan turned to modest losses with difficult tech industry conditions in Asia. The $25.7 million loss from continuing operations was $0.41per share. Excluding special charges, the loss from continuing operations was $0.37 per share. Our cash utilization was much reduced in the third quarter, and in line with our expectations at $15.8 million. Slide number eight shows the components of the cash flow. The adjusted EBITDA for the quarter was a loss of $17.2 million. Depreciation was $3.7 million, and amortization of intangibles was $800,000. Restructuring cash outflows were $5.4 million a peak outflow for the restructuring program, and cash interest expense was $0.5 million. Working capital management produced a net $6.1 million cash benefit with the largest component, being an $8.1 million reduction in gross inventories. All of this resulted in a $16 million cash outflow from operations. Cash expenditures were $1.8 million with the largest component relating to the completion of our North American ERP systems deployment. Cash from the sale of fixed assets and favorable currency movements on cash held by foreign operations, together provided a $2 million cash benefit. On slide number nine, you will note that cash and marketable securities moved from $130 million at the beginning of the quarter to $114 million at the end of June. This includes, those securities classified as long term on our balance sheet, which had nevertheless freely marketable, and considered reedy liquid. Receivables performance improved in the third quarter with a DSO reduction of four days, with increased revenue levels resulted in a $2.5 million increase in the absolute balance sheet volumes. As previously mentioned, gross inventories were reduced by $8.1 million, net inventories resulting down by $7.1 million with the sale and/or disposal of some significant amounts of previously written down inventories. The use of our existing inventories reduced the level of external purchases, and as a consequence our accounts payable decreased by $400,000 although our days payable outstanding increased by five days. Accrued restructuring costs decreased by $3.7 million during the quarter. The majority of the remaining cash costs that has been accrued, relates to lease properties idled a number of years ago. In the next three slides, I’ll briefly cover our sequential segment performance. On slide number ten; we summarized sequential results of our critical solution segment. Continued weak industrial markets and some continued inventory holdings by semiconductor and solar customers resulted in a modest demand picture early in the quarter. Momentum picked up in June, but the quarter still saw a 2.4% top line decline. Gross profit, before amortization and special charges improved by $400,000 with the full quarter impact of the second quarter restructuring items, and the segment reported a 5.4% GAAP gross margin, well below the high 30s margin we expect when we are closer to full capacity utilization. As noted earlier, we had high R&D expenditures associated with our instrumentation products during the quarter. On slide number 11; we reviewed the systems solution segments. Revenues grew 72% with growth experienced across nearly all of the various systems solutions provided by the group. Growth was heavily orientated towards the larger semiconductor OEMs. Gross margins, before amortization and special charges improved by $4.7 million or a 78% increment, for every dollar of incremental sales reflecting both the marginal contribution of additional business, as well as the full quarter benefits of restructuring. This segment still carries significant surplus capacity costs, most notably in the extended factory business, as we are poised to support our customer’s growth plans. Operating expenses were reduced by $2.1 million or 22% sequentially. With slide number 12; we look at the global customer operations. As with our other operations, we saw revenue growth that was back end loaded in the quarter, resulting in overall quarter-over-quarter growth rates of 9%. This increase in end use of fabs service and repair activity during June all goes well for fourth quarter performance. Gross profit before amortization and special charges improved by $700,000 and GAAP gross profits improved $3.3 million, with significant reductions in intangibles amortization expense to the segment. Operating expenses were held flat resulting in the loss from the business. To frame our comments on the future, we’ve updated our break-even charts as presented on slide 13. Adjusted EBITDA break-even has progressed below $8 million and brings us to a position where revenues in the mid 50s per quarter will result in an EBITDA deficit of less than $10 million. So looking forward to the future, what do we see? Slide 14 summarizes those thoughts. June performance was stronger, and overall bookings taken in during the quarter increased to $47.2 million. With this and the visibility we have to near term OEM bill plans, we’ve set our internal plans for at least 25% revenue growth for the September quarter over the June quarter. We shall see the profits drop through from those revenue increases, at least at model levels and further narrow our loss and negative EBITDA for the quarter. With inventories continuing to reduce through this recovery period, we are projecting cash utilization to be closing in on break-even levels. With that, I’ll hand the call back to Bob.

[Bob Lepofsky:]

In my opening comments, I said we thought we were well positioned. Let me give you some additional insight into why we feel that way. Clearly, we think our financial model is working and will continue to deliver impressive profit drop through on every incremental dollar of sales, and that we will continue to demonstrate excellent working capital metrics. We chose not to reduce our infrastructure further, as we continue to have confidence that we will see the top line grow in the quarters ahead. While the rate of improvement in business from our semiconductor equipment customers may be the subject of debate, the trajectory continues upward from the unsustainable levels seen earlier this year. In addition, across the company we are seeing positive indicators that we are on the right path. Our goal of being a strategic business partner, an extension of our customers engineering, manufacturing and product support capabilities is playing out. In our extended factory business, the hardest hit by the downturn, we are seeing booking improvements daily. Customers trust us and they depend on us. Indicative of the relationship we have with the largest players in this sector, is our recent receipt of Lam’s 2008 Supplier Excellent Award, attribute to the dedicated efforts of our people in Portland, Oregon and Wuxi, China. Lam and other large OEMs are totally dependent on these facilities to meet their own customer commitments. Lam noted in making this award, the 100% on time delivery record of both plants. Particularly impressive, given the extremely short lead times and high level of configurability demands placed on them. Also noted were Brooks cost competitiveness, technology partnership achievements and exceptional service support. Lam commented in making this award that Brooks had the best quality scores of any of Lam’s extended factory partners. This business unit is well positioned with all major OEMs in our business and valued by each for the same range of positive attributes. Our robotic and pump businesses are recovering slowly, as OEM accounts continue to work through inventory positions accumulated before the downturn. Meanwhile, this part of our business has used the downturn to improve internal effectiveness, focus on new product platforms and target new design end opportunities. In the robotic arena, we are strengthening our relationship with the Yaskawa Electric Company, our joint venture partner in Japan. The combination of our widely acclaimed and highly differentiated vacuum robotics with the Yaskawa’s versatile and proven atmospheric robotics, will allow both of us to attain global market leadership in the semiconductor space and further distance us from any potential competitor. Other parts of our critical components portfolio of solutions, are looking forward positively as well. While the slowdown in solar has tempered growth in our polycode unit, new products and a renewed focus on opportunities in China will facilitate revenue growth for their products in 2010 and beyond. Our RFID unit continues to make positive contributions despite their small size. Their products are a critical component of semiconductor front ends and their top line is growing again as the recovery takes hold. Their rate of recovery is being aided by market share gains and market diversification initiatives. Prospects for our instrumentation business, the final piece of our critical components group remain very strong. While the base business serving the analytical instrument and semiconductor manufacturing sector is projected to recover slowly, we remain focused on the new product line we have spoken about in prior calls. The plans for this game-changing product in the gas analysis sector remain on track for a formal rollout later this calendar year, with increasing revenues expected throughout next year and beyond. Our systems solutions group based in Chelmsford, has used the downturn to restructure and refocus their efforts as well. While they continue to be highly regarded by customers in the magnetic media production space, they have intensified their work with existing and new customers in the lithography and metrology space. In addition, their work and support of increasing demand for LED manufacturing capability adds to our expectations for their growth in the future. Our global customer operations, is another area where we carry the burden of a large global infrastructure, but one which we think is now ideally positioned for significant growth. Hit hard by the March ending quarter, by the downturn in chip factory utilization, this business has rebounded strongly in the June quarter. As Martin noted, their 9% sales increase, excluding spare parts, was heavily back-end loaded. Their top line will continue to grow as wafer fabrication increases. Importantly, they have significantly enhanced their partnerships with major OEM accounts. Many of whom are restructuring their own service businesses and expanded our late, local repair capabilities, particularly in Korea, Taiwan and China. Again, this business sector is highly leveraged for significant drop through on every incremental dollar of revenues. We expect that this business will be a major contributor to our sequentially improving quarters independent of the rate of improvement in new tool shipments. So as you can see, across the broad spectrum of products and services that make up Brooks today, we see all positive trends. We are the clear market leader in each slice of our targeted markets and each has strong growth opportunities. The restructuring of Brooks over the course of the last year has been difficult and costly. The quarter just ended has demonstrated the credibility of our business model. We see the period ahead as one of continued growth in our top line, driven by an improving external environment and our own product and market initiatives. With that top line growth will come excellent incremental income drop through resulting in the kind of bottom line and balance sheet performance our investors have been waiting for. With those comments, operator, we now like to open the line for questions.

[Operator:]

(Operator Instructions) Your first question comes from C.J. Muse - Barclays Capital.

[C.J. Muse:]

I guess first question, you guided revenues 25% plus. I guess it was hoping you could frame what the magnitude of that upside could look like and if it came in higher, what would drive that?

[Martin Headley:]

I think, we would say that the upside to that would probably be into the range that you’ve heard. Most of our OEM customers talk about at the very high end. Probably a little moderated from that level, because of the fact that we still see much more slowness and lack of traction in some of the later cycle areas, such as the industrial market. Frankly, what we’ll guide it to an increased pace will be the degree to which end users increase the pace of service and spares. Requirements over the course of the quarter, not something to which one has far less of an advanced visibility to and that you’re really reacting to day-by-day and week-by-week developing situations.

[Bob Lepofsky:]

C.J., I think our position is, as you can tell from my comments, we’re sitting here now extremely well positioned. Well positioned to respond and I think that is the key. We are now in a respond mode and respond quickly. We saw the quick upturn in June and we satisfied all the customer demands. We think that the two areas that most likely have the highest upside potential. As Martin noted, are the extended factory business, that’s directly related to the short lead time requirements for new tools and the product support area, the global customer operations area. Those two, relate to the highest upside. Interestingly enough, those two have somewhat different profit profiles in terms of their dropdown. The lower obviously, being in the extended factory, the higher being in the global customer operations. So net-net, we think that any mix of upside will translate positively for us for the quarter.

[C.J. Muse:]

If I could follow-up with a second question, I was hoping to discuss cash burn. I guess, I thought your target was $10 million or less cash burn in June. It came in I guess roughly $16 million. So I was hoping you could discuss, what surprised you there? Then I guess perspectively for September, what your target is? Then as part of the dialog, can you comment about your current cash position and in terms of where it’s domiciled or located and whether there would be any difficulties bringing it back into the U.S.?

[Bob Lepofsky:]

Firstly, in terms of maybe I was insufficiently clear. The guidance we gave, regarding about $10 million cash burn was excluding restructuring cash, which was obviously significant, it was about nearly $6 million. So the $16 million from our point of view was exactly the number we expected. So it came in right in the middle of our expectations. In terms of looking forward to future cash, if you look at our guidance on the revenues and you look at that delta versus our breakeven situation and we get this nicely below $10 million of adjusted EBITDA. As I made reference in my prepared remarks, we’re in a situation here of still burning through inventory, because we were caught before the beginning of this downturn with two higher inventory situations as some further down the supply chain. We’re continuing to burn through that. You saw over $8 million generated, from inventory in the current quarter. We have much more moderated capital expenditure requirements with the completion of our North American ERP deployment. You can see, you get down into a very narrow range of cash burn. We would love it to be break even and we are striving to get it as close as possible to break even. Realism, suggests it might just end up $1million or $2 million short. Finally, the characteristics of our cash; we have in total well less than $20 million of that cash currently offshore, because of our current tax situation, we have very limited restraints and constraints on repatriation of that cash. We have taken our time; we repatriating some to absolutely maximize every last dollar of tax circumstance, but the tax costs are bringing it back are very modest as compared to situations some other companies may face.

[Operator:]

Your next question comes from Peter - Citi.

[Peter:]

This is Peter for Tim. I wanted to ask you about on the leverage, just to make sure the model is between the June quarter and break even, it would be $0.50 of every dollar that falls through on operating margin? Then once you get to break even, what would you expect margin fall through to look like?

[Martin Headley:]

With the depressed nature of what’s happened in our extended factory that number is at the higher end on the mixed factor currently. The guidance I gave about our future performance was based upon a variable drop through to the bottom line that’s in the mid-low 40s, which is the balance between higher marginal performances on businesses, such as services and spares businesses and obviously, the lower variable contribution from a business, such as our extended factory business.

[Peter:]

Then also, you’ve taken probably about, I guess some you’ve lowered break even about 40 million through the year. How much of that, do you expect to be temporary? In other words, how much of that do you think might actually have to come back into your model next year, somewhat regardless, where revenues would be?

[Bob Lepofsky:]

We’ve made the point several times that we went into this year with this major restructuring of the company plan and the cuts that we have made are permanent cuts. As a matter of fact, we take note of the fact that the only temporary cuts really came in three areas. Board compensation was reduced, that was a temporary cut. It’ll be reinstated as things improve. The most senior executives of the company had a temporary salary. We did not go across the board. Our employees, we kept their salaries constant, but they didn’t see salary increases. So, in that area the only place you have any growth is in the year ahead, as we come back into profitable operations. We’ll reinstitute on a scheduled basis salary increases. The rest of our cuts in infrastructure, which were quite substantial, are permanent. What we have now, is the variable costs come back, direct labor people, who are productive people and add profits not costs, as we continue to grow the top line.

[Operator:]

Your next question comes from Hari Chandra - Deutsche Bank.

[Hari Chandra:]

I’m assuming that most of the cost cutting is done and if so, at current cost structure level, what revenue would it support?

[Martin Headley:]

Sorry, I missed the last part of your question.

[Hari Chandra:]

With the current cost structure, how much revenue would you be able to support?

[Martin Headley:]

The upside, we think the upside elasticity on what we have today as a cost structure before there would be any meaningful fixed cost increases is well above into the $125 million, $150 million, $1.25 million range. So significantly above where we are today, and into the realms of where you’ve got substantial profitability from the business of that level before adding anymore further costs.

[Hari Chandra:]

From a data point standpoint, can you give the bookings and the backlog data for the quarter?

[Martin Headley:]

The bookings data, as I mentioned in my comments, was $47.3 million and our backlog is approximately $34.5 million.

[Operator:]

Your next question comes from Ben Pang - Caris & Co.

[Ben Pang:]

First, on your R&D effort can you give more color around how long the program is going for the measurement product that you commented on?

[Bob Lepofsky:]

That program for the new gas analysis instrumentation will conclude a major initiative that has gone for about a two year period. There was early work in defining the technology area, defining the product, but the serious product activity is now about two years old and reaching its conclusion. Conclusion for this phase, because as we have noted this is the beginning of a significant product line expansion. So, it we will continue to, once we do the initial launch, continue to broaden this product portfolio around this core offering.

[Ben Pang:]

The second question, you commented in your opening comments about a lot of strength with your top or large OEMs. Typically when you guys recover, how much of a lag is there between some of your smaller customers? Is it more than a quarter or…

[Bob Lepofsky:]

No, I think it’s pretty quickly across the board. The reason that it was so large for those large OEMs is the amount of activity that comes out of our extended factory; whereas, the smaller OEMs are typically the customers of our Critical Components, and Critical Solution Systems Group. So, you have that big impact in the extended factory of the large OEMs.

[Operator:]

Your next question comes from Satya Kumar - Credit Suisse.

[Vince Valuri:]

Hi. This is Vince Valuri for Satya, a quick question on your space and upgrade. You said it was back half loaded your things trend into the next quarter. How do you see it beyond that, given the fact that utilization rates have ramped up pretty nicely?

[Bob Lepofsky:]

This is the beginning of the turn. Obviously the initial kick up is solely related to compared to the march ending quarter where things are basically shut down, but the fundamental dynamic of that business is strong. We think that we have added momentum in addition to the factory utilization by our expanding relationships with major OEMs and doing more of their work, compared to third party providers around the world. So, we have both a market expansion market share of the work to be done against the backdrop of a growing market for the work, meaning, in support of fabs.

[Vince Valuri:]

Other thing you mention about this RFID, you see positive contribution on that. Is this whole business the opportunity for Brooks in this segment?

[Bob Lepofsky:]

As I’ve noted, it’s our littlest unit, but it’s a little engine that could. It’s a group of people who work very hard. Historically in the company, it was totally focused on the RFID opportunity within front ends and load ports. They have an important part of that business. We’ve actually been giving them, in the course of this downturn, some more resources and some more slack to expand their activities. They do a number of things in the non-semiconductor area. Many of them are interesting, but at this point all in, this is still a very, very unit within the Brooks critical components business. One in the future, we’ll continue to reassess their opportunities and their potential.

[Operator:]

Your next question comes from David Nierenberg - Nierenberg Investment Management.

[David Nierenberg:]

Very impressive work, reducing the cash burn and the possibility, that it could be as little as $1 million or $2 million in the September quarter would be really wonderful. As the lawyer and me always notes how carefully press releases like this are written. I like particularly, the language on page one that says, Brooks leadership position…, is clearly strengthening. I’m interested in giving you an opportunity Bob, to elaborate on that, because I know that around the world, many of your competitors are smaller companies that probably had a great deal of difficulty surviving the credit and industrial markets of the past three quarters.

[Bob Lepofsky:]

I think our leadership position is expanding. I think first of all, we protected our position during the downturn. The investments we elected to make to ensure that we not only were responsible during the downturn, but we were well prepared in support of our customers, for any up tick when it came. That’s particularly important in the extended factory. It was important, clearly in our global services business, likely important in terms of our R&D activities and engineering support of existing and new product programs. I think the other piece that you’ve heard us say before, we think it’s important going forward, is our strategic partnerships and not only ability, but our commitment to actually strengthen those partnerships, so that we can leverage our size and capability. So I think our strong balance sheet certainly was an important piece. Our conviction was a certainly important piece. Most importantly, was the rolling up of the sleeves of the people of this company through the course of the downturn and again, I don’t want to make it sound like everything is behind us and life is just wonderful now. We’re still in the midst of a recovery. We’re not at the top of the mountain. We’re still climbing this mountain. With regard to some people who have not made it through this downturn. I think that they didn’t have the resources, the momentum, the focus and the commitment. I think, not only did we layout a business model earlier in the year. We said, we had both the capital and the conviction to succeed and I think these are the early signs that capital and conviction are going to payoff for our shareholders.

[David Nierenberg:]

I imagine that your large OEM customers are very pleased that while you’ve significantly cut the cost of the company, you have not impaired your ability to flex up as fast as they need you to?

[Bob Lepofsky:]

That’s for sure. That has again, opened opportunities for us.

[Operator:]

Your next question comes from C.J. Muse - Barclays Capital.

[C.J. Muse:]

Just wanted to follow-up on informal top line guide, I was hoping you could shed light on specific gross margin and OpEx targets as well?

[Martin Headley:]

I think, as it relates to gross margin. Given we haven’t much in the way of dynamics of continuing restructuring. Then just seeing, you’re seeing the strong contribution that comes from those incremental revenues and you should see those drops through in the low to mid 40% or as a percent of every dollar of incremental sales. You should also expect to see no increase in the operating expenses and if you use that as a crude, move forward over the next few quarters, you would be having a business model that would not be far from what we should expect to achieve.

[C.J. Muse:]

So, just to confirm, the low to mid-40s, is that the incremental operating or gross?

[Martin Headley:]

That’s the gross, but there isn’t much that’s variable below the gross margin line.

[C.J. Muse:]

At what you point, would we start to see at least the selling costs start to increase? Is there a particular dollar amount where we should think about?

[Martin Headley:]

It’s not really meaningful in that juncture. If you look at how much of our sales go through a relatively narrow OEM base, that’s does not need to flex upwards to do significantly more level of sales, if you look to our service in spares business, where the key contact is with the fabs. That contact is in place through the infrastructure of our global customer organization and similarly needs to flex very limited fashion. So, we don’t have a kind of selling cost increase requirement that has much of variable components in it at all.

[Bob Lepofsky:]

This comes back to the conviction to our model and why we said earlier that we believed in the model and we believed in the potential and we believed in the way we sized the company and consequently the cuts that we took, were permanent cuts that also means as things come back, we’ll be utilizing the capacity and capability we have, whether that’s factory capability, global customer operations capability, selling capability, G&A capability. So, we have if you will, excess capacity today. That’s the burden that our shareholders have borne in this last couple of quarters. We like the sizing that we’ve done because we believe that the top line will be there. So, that's why we also feel confident you will not have growth in infrastructure or growth in the cost structure.

[C.J. Muse:]

Then one last follow up for me, I promise. In terms of the competitive landscape, I guess recently Crossing Automation bought the assets from Asyst. So, I’m curious, what your thoughts are on that? How you view that as a competitive threat, if at all?

[Bob Lepofsky:]

Obviously, Asyst was in three businesses. They’re most important and largest business was the AMHS business, the fab wide material handling business. That was a business that Brooks exited from a number of years ago. A very tough, very difficult business and that’s the business that was bought by one of their Japanese competitors, and really was the heart of Asyst. The second piece was a software business and that was bought by another party. There was a small residual in areas that crossover in areas of interest to Brooks. We looked at all of the pieces. We did not believe that those pieces offered returns to our shareholders. We think that Crossing is a fine young start-up, oriented in a segment of the market with products that we’re not particularly focused on. We think that, the Asyst acquisition will certainly bring a set of challenges and opportunities to them, given the history of that business as part of Asyst. So, we look at those as potential future collaborators with us. Some of our products go into the Asyst product line and on the other side we actually buy some of the pieces of that in support of our activities. So there’s actually cross commerce. So, we didn’t view that as an opportunity nor a threat and we wish the guys at Crossing good luck as they try to take that and really make it into a viable business, because it certainly has struggled within the assist environment over the past years, given their focus on AMHS.

[Operator:]

Your final question comes from Tim Arcuri - Citi.

[Tim Arcuri:]

Yes, I want to follow up on something you had talked about, in addition to utilization, helping your services and spares. You actually said you feel like you gained some just bigger share of Wallet, I guess. Is that something that’s just in place or do you actually see incremental opportunities going forward for that? Can you help me just think about the value proposition of you gaining share there. How that works with the OEMs or kind of what the benefits are to them and then the end customer as well?

[Bob Lepofsky:]

Yes, that will be a piece of additional and growing activity, overtime. It’s not something that is behind us as a matter of fact, most of the potential is ahead of us. I think fundamentally, the issue is one of collaboration and in a partnership with the OEMs, the real challenge that any equipment supplier has, whether he’s an OEM or a sub-tier supplier like we have, are the so-called third party providers. Third party providers come in and initially can offer an end user a potentially attractive financial position, but they don’t have the knowledge-base, they may not have the capability, they may not have the spare parts. They may not have the quality of service that is ultimately measured by the performance post repair. So for us and the major OEMs, the collaboration becomes really one of they turn to Brooks, for Brooks support to Brooks products and if you will, we share a common alternative, which is the third party providers. The third party providers take a piece of the business and so that’s an economic hit, but more importantly, potentially damage the reputation and performance of the piece of equipment that either an OEM or sub-tier supplier is providing. So to the extent that we keep that among ourselves, we are net ahead. We have had success in collaboration of sharing the responsibility with customers. We’re highly respectful of the customer interaction and that’s another differentiation against a third party. The third party’s interests are self interests. Our interest is shared interest to keep that user happy while also working collaboratively with the OEM. So with the OEM, we’re not a competitor, we’re a collaborator; and our agreements are just ensuring that we have the right balance between both relationship and the dollar flows from the OEM, from the end user either to us or to the OEM and then back to us in the robotics area. This has been a very successful model for us in the pump side of our business. It’s an expanding success model for us in the robotics side of our business.

[Operator:]

That is all the questions we have at this time. I would like to turn the conference back over to you, Mr. Headley, for any closing remarks.

[Martin Headley:]

Thank you all for participating and showing your interest in Brooks. Good evening to you all.

[Operator:]

That concludes today’s conference. We thank you for your participation and we hope you have a wonderful day. You may now disconnect.