Brooks Automation, Inc.
Q1 2010 Earnings Call Transcript
Published:
- Operator:
- Good day, everyone and welcome to today’s Brooks Automation earnings conference. Just as a reminder today’s call is being recorded. At this time, I’d like it turn the call over to your host for today, Mr. Martin Headley, Chief Financial Officer.
- Martin Headley:
- Thank you very much Sarah, and good morning everybody. I’d like to welcome each of you to the Brooks Automation fiscal 2010 first quarter results call. Our press release was issued earlier this morning, and is available on our website at www.brooks.com. You’ll also find posted there copies of the PowerPoint slides used during our call today. I’d like to remind everybody that during the course of the call, we will be making forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. There are a number of factors that could cause actual financial results, or other events to differ significantly from those identified in such forward-looking statements. I refer you to the section of our earnings release titled Safe Harbor statement. Safe Harbor slide on our website and to the company’s various filings with the SEC. I would also note that we will also 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, and should not be relied upon to the exclusion of GAAP measures. Management believes those financial measures provide an additional way of viewing aspects of our operations, that when viewed with our GAAP results and the reconciliations to GAAP measures provide a more complete understanding of our business. Robert Lepofsky, President, and CEO of Brooks will open the call. After which I will provide a more detailed overview of the first quarter financials and then we’ll turn the call over, after our prepared comments to take your questions. Bob.
- Robert Lepofsky:
- Thank you, Martin, and good day ladies and gentlemen. We appreciate you taking the time to join our call today. For earlier this morning, we announced our results for our first fiscal quarter ended December 31. Quarterly revenue growth was up some 65% sequentially ahead of our projected growth of 45%, substantially higher than the 45% sequential gain we recorded in the September quarter and strongly I had of the sequential revenue growth you’ll seen from many of our customers and industry peers. Compared to last quarter when we had a $14 million loss we moved to essentially breakeven operations this quarter and now project progressively stronger profitability in the quarters ahead. At this level of revenue, you and we would have expected stronger sequential operating performance given our pace of drop through performance in recent quarters and our target performance model. Two principle factors contributed to the lower performance, revenue mix and expedited transportation cost cos. The revenue mix relates to unusually high proportion of extended factory revenues, which as you know delivers significant lower gross margin and profit drop through. Our target performance model assumes extended factory operations to represent about 20% to 22% of total revenues. Last quarter that number rose to about 29% of revenues. Late in the quarter, an accelerated ramp schedule was placed on our extended factory operations in both the United States and China. Our people and our supply chain partners were challenged to rapidly accelerate planned output, including some new system platforms that were not expected to be at full production rates this early and further stressed our supply chain. The good news our people and our partners came through and performed incredibly well positioning our key OEM customers to deliver excellent performance in the closing weeks of last quarter. Unfortunately that performance came at a cost to us a roughly a million dollars in special expediting and transportation costs. These circumstances remind me of the words of a former colleague who would periodically step back and question why it is bad to do good things. Importantly our core business, components, systems and service had strong sequential growth, performed well in absolute terms and operated within the bounds of our target model. With about $75 million of non-extended factory revenues in the quarter, we pass through the breakeven point, delivered positive EBITDA and generated cash. Equally or more importantly, during the quarter just ended we remained on track with our critical operational improvement, margin enhancement as well as product and market development initiatives that are key to our full year 2010 performance and which position us for 2011 and 2012, by which time we continue the project having a broader product portfolio wider market reach and impressive financial performance. To that end I want to quickly provide you with summary update on just two of those initiatives. Our work in what we broadly refer to as the gas analysis market and are work in the high brightness LED field. In gas analysis we begun the first stage of a carefully sequenced stream of product introductions, built around our unique and proprietary Ion Trap technology. The initial public disclosure of key elements of the technology presented at the American Vacuum Society conference in November resulted in the receipt of an innovation award from AVS, confirmation of the uniqueness and attractiveness of our solution set and a high degree of interest from key players in targeted application areas. In April a formal product release will take place at the society of vacuum coders meeting with initial revenue generating products deliveries beginning shortly thereafter. We are currently expecting growing revenue stream from this new line of measurement solutions the second half of fiscal year 2010, and important contributions to both our top and bottom lines in 2011 and beyond. Our initiatives in the high brightness LED field continue to progress and expand. As we discussed before, automation is considered a key enabling technology in facilitating the growth of LED production equipment market and in particular at successful expansion in to the illumination sector. The breadths of our engagements with key participants in the field are increasing. Our people are working extremely hard and staying on target. We have dedicated project teams working with key OEM accounts developing new and unique solutions that leverage component and automation systems expertise. Initial deliveries of next generation tool solutions are on track and will take place within the next 60 days. Revenues from our newer engagements will be increasing in the latter part of this year. We see our work in the LED space as a critical element of our growth and market diversification strategy and expect to see important contributions to our top and bottom lines in 2011 and beyond. Particularly as the demand for LED based illumination products continues to gain momentum. Finally you might note in our press release our reference to two IP based transactions that closed shortly after the quarter ended. In one case we acquired IP that will add to our present deep and substantial IP portfolio in the two automation field. In the other case, we sold IP that have been developed some years ago, but is no longer exploited by Brooks. In short we have a lot going on at Brooks and while each of the moving parts is not exactly playing out as anticipated the critical elements of our plan are in place, and are on target. The first half of our fiscal 2010 continues to be dominated by the steep ramp in output to support the current needs of our semi conductor OEM accounts. We expect that the second half will see an increasing impact from our strategic initiatives, be that improved cost price structures of existing products, the growing impact of new products, and the increasing penetration in new market segments. Against that broad backdrop, I will pass the call back to martin. Who will provide additional color and details on the quarter’s performance before we open the call to your questions? Martin.
- Martin Headley:
- Thank you, very much Bob. During my prepared comments I will make reference to slide numbers from the PowerPoint presentation, posted on our website to accompany these remarks. On slide number three, you can see the impact of the significant ramp in semiconductor capital activity driving our revenues up $42.1 million, or 65.7% on sequential basis. This translated in to a $14.4 million improvement in gross profits, a 34.2% incremental rate. This was impacted significantly by the much faster growth of lower margin extended factory business and $1 million of expediting costs incurred in support of this aggressive ramp of business levels. R&D spending increased very modestly, returning to levels of a couple of quarters ago. The September quarter costs have reduced activity and cost levels. SG&A expenses were essentially flat. Sequentially, we narrowed the operating loss attributable to Brooks, before special charges, $2.3 million and we would have shown profitability for the quarter as a whole, but for stock compensation expense increases. The revenue recovery was mostly driven by increased sales to our larger semiconductor OEMs, as a result of which semiconductor revenues rose further to 85% of sales in the December quarter, as shown by the chart on slide four. Sales rose in most of our served market segments just not as aggressively as the semiconductor business. Top four semiconductor OEM customers comprised about half of the revenues in the quarter. Slide number five shows, how the revenues and operating profits before special charges bridge from our fourth quarter of fiscal 2009 to this first quarter of fiscal 2010. In particular, it demonstrates that although the overall drop through was lower than projected, each of the businesses was operating to the model we’ve previously explained. Excluding expediting costs to support the ramp of core critical solutions in GCO businesses provided incremental profits of 49% on each additional dollar of sales over the September quarter. The system solution business only provided a 23% incremental contribution excluding ramp support cost, as a result of the heavy weighting of growth from extended factory. Expediting costs were mostly exceptional freight for both inbound and outbound transactions to assure appropriate customer service levels in this rapidly accelerating environment, though many of our supply chain partners find challenging. Few of these costs will be considered permanent, unless some will extend into the early weeks of the March quarter. Slide number six shows the progression of adjusted EBITDA to positive territory, first from restructuring actions taken into the second quarter of fiscal 2009, and then from the strong subsequent revenue growth. We would also note that $26 million improvement in adjusted EBITDA from a year ago leveraging off some $33 million in revenue growth, majority of which is from our lower margin extended factory business. From a Reg G perspective, please note that adjusted EBITDA reconciliations are provided as a supplement to the each of the quarterly earnings releases. Turning to slide seven, both special charges and taxation had negative impact on the GAAP net income in the quarter. Special charges comprised restructuring expenses of $1.5 million, and included $.2 million related to the cumulative impact of prior periods in accuracy and present value discounting of multiyear facility restructuring liabilities. We also incurred a final $2.2 million loss on liquidating a residual minority investment position. Interest income moderated slightly as the short term investment yield environment gets tougher and currency fluctuation impacted in other income. We recognized a $600,000 income tax provision with higher foreign taxes that are not sheltered by loss carryforwards. Our Japanese joint ventures narrowed their loss profiles for the quarter, but did not get to breakeven. Overall, the loss attributable to Brooks improved from $14.5 million to $2.8 million that loss was $0.04 per share on a fully diluted basis. Excluding special charges, the loss from continuing operations was $0.02 per share, and was a profit of $0.01 excluding stock compensation expense. We generated cash of $800,000 in the quarter as shown in slide number eight. Restructuring cash outflows were $1.5 million. More importantly, we only utilized $3 million of additional networking capital in supporting the ramp or $0.07 per additional dollar of sales on an incremental basis. As a result, we were able to generate $1.4 million in cash from operations. Capital expenditures for a second successive quarter were $0.5 million. Modestly higher capital spending is projected for the remaining quarters of the fiscal year. Looking at our critical balance sheet accounts setout on slide number nine, you will notice the growth in cash and marketable securities from $110.5 million to $111.4 million. This includes those securities classified as long term on our balance sheet, which are nevertheless freely marketable and can be considered readily liquid. Effective working capital management is a critical element of our focus to produce enhances return on cash investment. Overall our working capital velocity improved with working capital reduced to 16% of analyzed quarter sales. In this area, receivables performance improved again with a day sales outstanding reduction of 9 days, which limited the impact on receivables from increased revenues to $14.8 million. Inventories increased by $5.1 million, with some slight imbalances at some vendors excelled in supporting the ramp and delivered on time, while others struggled and caused the holding of inventory. Overall, inventory turns are headed in the right direction improving from 2.5 to 3.6 turns. Day’s payable outstanding moved out 4 days, with payables increased by $19.8 million. Accrued restructuring cost decreased by $700,000, with the accrual of adjustment previously referred to, partially offsetting the continuing cash payments of the accrued liabilities. In the next three slides, I’ll briefly cover our sequential segment performance. On slide 10, we summarized the sequential results of our critical solutions segment. The top line increased sequentially by 69%. With the strongest growth once again in our vacuum and atmospheric robotic product lines and have the greatest focus in semiconductor markets. Gross profits improved by $8.9 million to a margin percentage of 37%. Operating expenses increased slightly from R&D initiatives and seasonally adjusted spending. This business returned to profitability in the quarter with $8.2 million of additional profits. On slide number 11, we review the systems solutions segment. Revenues grew by 90%, heavily driven by sales to largest semiconductor OEMs from our extended factory business. With that lower margin mix, gross margins improved more modestly by $4.2 million. Operating expenses were essentially flat, and thus the segment two reported fully absorbed profitability for the quarter. The global customer operations results setout on slide 12, show 15% growth in the pure service business to $15.9 million. Gross profits improved by $1.3 million, and operating expenses were flat. This segment was profitable at the contributed profit level before allocation of corporate costs. After focus on the past quarter, I will briefly address the future. Our thoughts are best summarized on slide 13. Bookings increased by 68% in the December quarter, resulting in $103 million order backlog at the end of the calendar year. This growth in backlog together with imports from our customers, lead us to project revenue increases of at least 35% for the March quarter. This revenue mix will have even more significant extended factory mix profile, but again skews growth towards our systems solutions segment. Despite that we see the results in operating return on sales to be within our target model range of 6.5% to 7%. Additional factors that will impact our reported earnings in the March quarter are again arising from the sale, two day ago of the non-core intellectual property Bob referred to previously. This gain is estimated at approximately $7.8 million and finally with an expectation of sustained profitability, we shall be recognizing income taxes at an affective rate around 7% going forward. With that, I will open the call to questions. Bob will close the call after we have addressed your questions. Thank you, Sarah.
- Operator:
- Your first question comes from Patrick Ho - Stifel Nicolaus.
- Patrick Ho:
- A couple of questions, first in terms of the sustainability of the semiconductor OEM business on a going forward basis and our visibility is tough for you guys, but Bob, can you comment what you think might progress color, how the year might progress in terms of the capital equipment market?
- Robert Lepofsky:
- Thank you, Patrick. I think that I frame my response to you in the conference calls of some of our largest OEM’s over the course of the last week. Clearly the March quarter will again be very strong. It is strong through January it continues strong as a solid book of business. The book of business in to the June ending quarter is filling up very, very nicely and when we all look beyond the June ending quarter, it is with a level of lack of visibility and certainly there is as you well know this raging set of views out there one side believing that we are in a peaking and the other side believing that we are still expanding and as one of our largest customers said a week ago, we can only tell you what our customers tell us, we can only anticipate, we can’t guarantee. We fall in the camp of those major OEM’s that believe this is not a peak, but certainly the magnitude of the sequential growth rates can’t continue. If you just look at Brooks, 45% followed by 60% plus followed again we just can’t keep stocking 40-50% sequential growth, but we do believe that at worst a flattening and at best, solid growth in the traditional markets.
- Patrick Ho:
- Going to the LED business and the opportunity that you see on a going forward basis, I think you mentioned in the past that you expect to see automation, your critical components and your extended factory businesses, is there anyone of those three segments that will first see that type of ramp. Is it automation that’s getting the adoption right away and then critical components comes on, are you seeing kind all three hitting at the same time?
- Robert Lepofsky:
- At the present time, we supply numerous elements of our portfolio to a range of the players. As we have been discussing, given the fact that most of the tool sets that are in production today have very little automation content, one, and number two, there is broad agreement across the industry that automation is a key enabling technology that the next generation of tools schedule to being shipments in the second half of this year. That automation solution will be a key aspect of those tools. We are quite pleased in excited that we have enabling to leverage our component expertise with our systems expertise to be solution of choice for multiple players. So as a result the engagements are increasing and as we move forward we will have more automation system content going to targeted players and as I said in my prepared remarks. The teams are dedicated teams focused on individual customers and that means dedicated engineering, production, customer, interaction teams and we actually begin some initial deliveries as quickly as 60 days from now, but the real ramp to those start that impact us laid in 2010 and are absolutely key to our anticipated strong growth in ‘11 and ‘12.
- Patrick Ho:
- As you just mentioned on the semiconductor side of things, business continues to be really help we and continues to pick up. How are you I guess what give us assurance that we won’t having these kind of I guess expedited cost on a going forward basis, particularly if demand trends continue to be strong and your customers are basically asking you to accelerate their deliveries?
- Robert Lepofsky:
- I think in the earlier face of the ramp, which again we were in a ramp and that ramp took a significant inflection point in the first couple weeks of December and again I refer you back to the comments of some of our customers and so in the month of December things were really over heated and the focus of our people were get the product out the door to meet that set of customer requirements as they were attempting to meet their customer requirements. In the course of that process our people pooled out staffs to get their. Certainly did not in the last two weeks of the quarter say the customers well its ready to ship, but we need a new purchase order to cover the expense of air freight charges. Equipment was placed in airplanes accelerated deliveries and after the quarter ended anything were starting to coming to little more equilibrium as we got in to January gave us a chance to pause and also gave us the chance to engage with some of those customers about reequipping some of those access charges. So I think our people did the right thing for the customers painful for us as I said in the short term, but certainly demonstrated who we are and certainly positioned us well with our customer base going forward and we I think worked out the kink that said we will still have the heavier than normal impact of extended factory revenues against total revenues in the current quarter.
- Operator:
- Your next question comes from Hari Chandra - Deutsche Bank.
- Hari Chandra:
- My question on the gross margins given that breakeven $90 million range. Is did a land in gross margin above and beyond what you are seeing in terms of these expediting costs and also product mix. It looks like at seems to dropping to a little slower than anticipated?
- Martin Headley:
- It slowly the impact of mix Hari, as we made comment on the call, we are seeing drop through from core critical solutions and GCOP business 49% that consistent with our model on the breakeven if the mix where at the 22% I will prefer to for the extended factory. It’s clearly an awful of higher as well as the exceptional cost that we refer to and just talk about from an expediting view point. So, from our perspective those of the only things that are lacking our gross margin performance improving to the levels that we wish to see.
- Hari Chandra:
- A point of clarification in terms of the extended factory gross margins where they not now and where do you see they can potentially go.
- Robert Lepofsky:
- If you talk about us as the impact, clearly you see our systems solution’s gross margins are currently at about 16%. We see that those can drive over 20% nicely as I would blend it whole pretty rapidly up there we get a little bit more balance. So there will be progression as we move forward and we’ll drop through the rights we’d previously indicated.
- Hari Chandra:
- In terms of newer opportunities that you’ve been talking about for the past couple of quarters at least, LED gas analysis and also in the previous quarters about solar, which we may not have compared as expected, but how do you see all these three in the quarters ahead? What’s the size of the opportunities that is there for you to capture?
- Robert Lepofsky:
- I think that we have quantified the LED opportunities in a number of presentations that suggests that, it will rapidly grow, and in 2011, is an opportunity in the $20 million, $30 million, $40 million range and growing significantly from there. The analytical instrument business, and again this year, in 2010, the revenues are expected to be single digit millions for the full year, and moving very strongly into double digit millions next year.
- Hari Chandra:
- One final question, can you talk about customers projecting strong demand over the next several quarters, should this not translate into orders and also better visibility into the second half of this year for you?
- Martin Headley:
- I think the visibility continues, lead time continued to be relatively quick. So we’re receiving limited visibility outbound in terms of length of time, people are still assuming that orders can be placed on fairly narrow lead times and there is continuing adjustments amongst our OEMs week-to-week on the adjusting of that schedules. So we continued to see those fine tunings and tweaking that we continue to monitor, but still don’t give us an extended visibility with any longer timeframe than we’ve had in the past. Bob.
- Robert Lepofsky:
- I think that it is really a situation that as long as there is the high level of uncertainty in the broader economic picture on a global basis, there will be a ready sense for semiconductor device manufacturers to aggressively expand to the extent that they gain confidence and therefore have a more solid view about their growth prospects. You’ll start to see in fact a growing book of business longer lead times, and higher certainty at the equipment level, but in this period that we are currently in 2010, with the high level of uncertainty in the global economy, we will continue to be subjected to low visibility, and high expectation for rapid response to the demands of the chip makers.
- Operator:
- Your next question comes from Ben Pang - Caris & Co.
- Ben Pang:
- A couple of questions, first on the extended factory revenues, you mentioned that the mix was higher than you expect. I mean, how much visibility do you have on a quarter to quarter basis in terms of that visibility?
- Robert Lepofsky:
- Usually, we have reasonably good visibility. Again, I think that we were directly surprised on the upside, just as some of our customers have commented in their conference calls about their surprise in the early weeks of December on the sharp upturn. We were all in the midst of a ramp, that ramp was going pretty well and then in early December, many of us in the chain and some of our largest customers particularly, and the largest customer in our extended factory, saw a sharp upturn and we all collectively responded accordingly.
- Ben Pang:
- If I look beyond the March quarter, what’s your expectation now for that revenue stream?
- Martin Headley:
- I would hope that revenue stream would start to come more inline with our model and represent in the 20%, 22% of revenues going forward. The other piece is even that business will later in ‘10 and into ‘11, gain some market diversity different profile of customer and profit and I think it be an improving situation, but as we get further into this year, past the first quarter, I think we’ll come back into closer to modeled relationship for our extended factory.
- Ben Pang:
- Then on your new product stream, the kind of renew products that you’re talking about, how do we look at the margins for those products at the end of the year in terms of the mix? I mean if they get to 5% of revenue in a quarter, does it dilute the margin at that point?
- Martin Headley:
- No. In both cases, these are offerings and solutions that have margin profiles above our current core business margin profiles and that’s again why we think that we will continue to be on an improving track regardless of what happens in the semi business.
- Ben Pang:
- My final question, if your OEM business, your business to the primary equipment makers, how do you think that they will look at the inventory level for Brooks products, are they going to try to build some inventory given that everybody was rushing at the end of the quarter.
- Martin Headley:
- No way and I guess that’s just another piece of this puzzle. Again in our on going normal relationship, we’ve proved once again that there isn’t a need for a big inventory build, which certainly kills everybody on the turn down. So I think that there is real mind set relative to dealing with suppliers like Brooks that can turn quickly, respond, prevents that number one. It also prevents openings for customers to look at well Supplier A can’t meet my needs I think, I better go out and get a second or a third supplier, so there are also issues here of protecting position. I think those that don’t meet the needs and we see it in our supply chain, that’s where you start to protect yourself a little bit on the upside and make sure that it doesn’t happen in the future.
- Ben Pang:
- Given that scenario then, do you build in more of these expediting costs? Even, if the revenue mix is normal?
- Martin Headley:
- No, we don’t and that’s why we think that this is an unusual period. A lot of pieces came together. We were in the midst some of the work that was going on in the extended factory were some new platforms for customers that their original plans were the new platforms would move on a more rational basis through the first and second quarter, but again, as their business broke open, we accelerated that. There were some of our supply based transitions, domestic and low cost regions that were in a state of flux, so we had no excuses, but we had somewhat of a perfect storm in that segment of our business and coming again very late in the quarter.
- Operator:
- Your next question comes from Srini - Barclay Capital.
- Srini:
- This is Srini, calling for Christopher Muse. I just wanted to understand how you are going about attending your target model in the next two to three quarters? If you could enlighten me on what the target model metrics are going forward and how you would try to meet them? That would be very much appreciated.
- Martin Headley:
- Well, one of the key elements is that there are the elements of the new business that Bob referred to, starting to come into the portfolio. Actions that we referred to in terms of costs and profit enhancement actions on some of our existing pieces of business that enhance and move us along the path that we were moving forward on and projecting forward. As we build that in, and with the extended factory not growing and being the preponderance that it has been in the last quarter and we see it being in the next quarter, giving a better balance to the drop through and therefore the margin position on our business, that drives us towards that model that we were previously laying out, where we are now at 6.5% to 7% rate of return on our business projected for a second quarter and that builds forward into improved metrics with the drop through rate returning back to the 40% rate, when we have this mix issue more imbalance.
- Robert Lepofsky:
- Let me add that, this the issue of the model and the mix of businesses, we’ve tended to layout to try to get people to well understand that we have these two fundamentally different pieces of the pie, the critical component systems and services business, normally 35% to 45% gross margins and the extended factory, which normally has 15% to 20% gross margins and the extended gross margins do not include the Brooks component content. Against that model, we’ve also said that as we put together our aggregate business model, we expect that the lower end the extended factory will be in the 20% to 22% of revenues. What happened to us last quarter was the extended factory was (a) Almost 30% of revenues, 28%, 29% of total revenues and had lower margins even within that segment, because of the extra costs. So rather than mid to higher double digit numbers, we were below the double digit numbers. So we had both margin pressure in the extended factory, and the size of that business on the total. As we move forward, in the Q2, we will see improved performance in the extended factory, in terms of its costs and margins, but it will still be above model in relative terms. Above the 20%, 22% of total expected revenues. As we progress later in the year, the business mix, we anticipate coming step-by-step closer to the modeled performance. So I think that we are in impact of December, January, February, and then beginning balancing and as we get into the latter part of the year, we will comeback to our very strong model performance later in 2010, into ‘11.
- Srini:
- If I ask you about implied EPS for the next quarter, what would that be?
- Martin Headley:
- We really aren’t giving guidance to that. I mean the pieces are 6.5% to 7% operating margins on business that would be up for at least 35% from where we are now in addition to that we have some small level of restructuring costs, the $7.8 million gain on the sale of the intellectual property taxes, that are about 7% affective rate. I think people could view our joint ventures as neutral to our earnings in the quarter. So when you look at that, that’s earnings performance that nicely higher than anybody’s models that they currently have published at the moment.
- Srini:
- The one other question is on the LED portion of your business. What kind of revenue opportunities are you looking for a second half of 2010 and 2011?
- Martin Headley:
- We’re continuing to see how that one develops. The revenues are probably in the high single low double-digit kind of levels and for the fiscal year, with the build really probably becoming more impact to us in what’s the calendar year second half, rather than the fiscal year second half.
- Robert Lepofsky:
- So to expand a bit on there, we mentioned that some of the initial deliveries of our broader tool solutions come out of our factory in the first week of April. Those will move into our customers’ toolsets ultimately to their customers. So the question will then become pace of adoption and transition and we are just being cautious given the end of our fiscal year in September. We think that momentum will grow and we know we have requirements that extend into the latter part of the fourth fiscal quarter, into the fourth calendar quarter of 2010 and the important acceleration I think goes from there.
- Srini:
- My last question is basically on the June quarter. Do you think that the extended factory level of revenues will be a model of 20% to 22% or will it still be higher like we saw in the current quarter?
- Martin Headley:
- I think it will be higher than the model, but lit be moderating from where it’s been in the last two quarters.
- Operator:
- Your next question comes from Shawn Boyd - Westcliff Capital Management.
- Shawn Boyd:
- I just want to clarify a couple of key points here. First off on your SG&A, if I understand correctly, you got an extra million dollars in that December quarter number that we are looking at…?
- Martin Headley:
- No, it’s in the gross margin. Those are costs that we incurred and were recognized as parts of cost of goods sold.
- Shawn Boyd:
- Second point, on the at least 35% growth, previous caller alluded to this a little bit earlier, but just to put those on, we’re talking $143 million in revenues, and 6.5% to 7% margins get you to $9.5 million, $9.6 million in operating income, that I’m assuming is $7.8 million in gains we might see?
- Martin Headley:
- Correct.
- Shawn Boyd:
- Now that quarter is also still burdened by this heavier mix in extended factory. So my question to you is by how much, whether you want to talk about gross margin or costs or margin, anything that you can give us their to tell us how much that is still burdening that quarter would be helpful?
- Robert Lepofsky:
- I think the burdening is in the multiple million of dollars range. I mean, if you again the extended factory in the quarter will continue to be contributing to the bottom line. It will be contributing at a lower pace than the rest of the business and again in the ideal world or in the normalized world, the extended factory is as we said earlier in the 20% to 22% range, in the near term extended factory is in the 27% to 30% range and that will continue in the March quarter and then back off a little bit in the June quarter.
- Shawn Boyd:
- Now, to those of you might be little bit newer to the stock, what is it about extended factory that makes the inherent gross margin so much lower than critical component systems.
- Robert Lepofsky:
- Very simple the extended factory, is our name for it, that is fundamentally a specialized contract manufacturing business for a group of semiconductor OEM’s. The business model there in the contract manufacturing business is obviously quite different than in our proprietary products business and when we make reference to the extended factory, we strip out the products that are used in that factory that are proprietary products. So it’s a, if you will, a pure specialized contract manufacturing business. When you look at that business, it does quite nicely compared to people who are typically in the contract manufacturing business. We talk about as we said model margins in the 15 plus percent at the gross margin line. Little SG&A costs, very high return on invested capital. So as a piece of the puzzle and strategically this has been an important part of Brooks in the semiconductor space, in terms of our positioning with OEM’s in the market. It is run as a separate autonomous business, so we can see it, we report it within our broader systems group because strategically moving forward, and we are using that business as an extension of our growth opportunities, but fundamentally we come back and this has been part of some of our recent investor presentations and you see some slides that we have posted as a result of those presentations that says when you look at Brooks it contains two pieces. The proprietary business and the contract manufacturing business and usually they work pretty well together this period that we are in with the extreme ramp as put more emphasis on the contract manufacturing and it is added revenues. It is contributing to the bottom line; it just doesn’t contribute at the same rate.
- Shawn Boyd:
- So last point on this you alluded to some new customer relationships also helping the margin of that business in the back half of the year, what does that do for us verse thus 15% to 20% gross margin that we were thinking about on extended factory?
- Robert Lepofsky:
- Yes, we would say that the new customer activities and the new platforms will move to that 15% to 20% range. The key is that right now in the core semiconductor space, normally we operate in the 10%, 12% range and in the quarter just ended it even got stressed a little more, exactly.
- Shawn Boyd:
- Versus 10%, that we just had in December quarter. On the margins let’s get out of December and March quarters for a second and just reminds us again, what are your target gross margins and operating margins on a blended basis?
- Robert Lepofsky:
- With subject to mix, we continue to drive a balanced growth of the business that moves us in to double-digit operating margins. The blended mix at the gross margin level will tend to all in the 30s. With this mix of business it’s very difficult for the total company to move into the 40s.
- Shawn Boyd:
- To wrap it up for me, I want to go back to the very begin toughing Q-and-A where we talked about outlook, we understand that it is very dicey out there in terms of visibility, yet we have had a massive inflection in the December quarter that caused some of these issues and what I heard was from this $143 million revenue level, which is minimum in the March quarter, what we see now tells us that at worst the flattening, meaning sequentially flat from that, at best we have solid growth beyond p that, is that correct?
- Robert Lepofsky:
- I think that’s correct and I think here at Brooks we also feel that some of our adjacent market opportunities that gain some momentum in the second half gives us a little buffer if the flattening in the semiconductor starts to be turning down in the semiconductor, so the adjacencies are helping out and giving us confidence that full fiscal year 2010 and certainly full calendar year 2010 will deliver really excellent performance all in.
- Operator:
- Your final question comes from Benedict Pang - Caris & Co.
- Benedict Pang:
- Just two clarifications, one on your revenue growth 35%. That includes the one time IP gains.
- Martin Headley:
- That does not, that will not be recorded as a revenue item.
- Benedict Pang:
- Okay on the extended factory, correct me if I’m wrong here the old strategy was that you had contract manufacturing for this products, but split them over to the Brooks core products, right, is that still the way that business is going to work in the long term?
- Martin Headley:
- The old strategy as you may recall was to take customer designed automation solutions and overtime convert those customer designs to Brook’s designs. The old what was referred to as CDA to BDA? What has happen second over the years that conversion never took place and the principle output of our extended factory today continues to be customer designed automation. However, as we are entering new market areas, we actually are starting with Brooks designed automation, which would be produced in the extended factory. That will be margin enhancing as well as giving us greater control overall aspects of the design and supply chain that supports that design. So that business is going through its own transition as we look forward in latter 2010 and 2011, but today it is if you will your reference to the old business customer designed automation produced in our factory as an extension of our customer’s factories in a contract manufacturing model.
- Operator:
- It appears we have no further questions at this time. I would like to turn the conference back over to our speakers for closing remarks.
- Robert Lepofsky:
- Thank you, operator. That concludes our call today and we thank you for your time and participation. We look forward to sharing our progress with you over the months of head. Have a good day.
- Operator:
- Again, that does conclude today’s conference and we do thank you all for joining us.
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