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Brooks Automation, Inc. (NASDAQ:BRKS)

Q4 2009 Earnings Call

November 12, 2009 10:00 am ET

Executives

Robert Lepofsky – President & CEO

Martin Headley - CFO

Analysts

CJ Muse - Barclays

Tim Arcuri - Citigroup

Ben Pang - Caris & Co.

Patrick Ho – Stifel Nicolaus

Satya Kumar - Credit Suisse

Hari Chandra - Deutsche Bank

Timothy Summers - Newbridge Securities

David Dooley – Steelhead Securities

Operator

Good morning, and welcome to the Brooks Automation financial results 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 morning everybody. I’d like to welcome each of you to the Brooks Automation fiscal 2009 fourth 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 meaning 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. The 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 these 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 fourth quarter results and then we’ll turn it over to your questions.

Robert Lepofsky

Thank you Martin, and good day ladies and gentlemen. We appreciate you taking the time to join our call today. I opened our last call by commenting on the upbeat tone of our report at that time. Over the course of the last three months things have progressed in an accelerated pace and we are even more upbeat today encouraged by both our recent performance and our future prospects.

During the September ended quarter our results again demonstrated the creditability of our financial model, and the operating leverage that we can derive from every additional dollar of sales. With a favorable product and customer mix, across our broad portfolio of solutions, and a couple of favorable end of year adjustments which Martin will touch on, we actually well exceeded our targeted 40% drop through in the quarter.

Our ability to respond to the surge in demand from our customers that began accelerating in late summer, coincidentally at that same time of our new Oracle business system implementation cutover, is a result of the intense collaborative efforts of our people, our supply chain partners, and our customers.

The 46% sequential increase in revenues we have just reported was back end of the quarter loaded and to some extent supply chain constrained. Six weeks into this quarter customer requirements are continuing to increase, material flows into our factories are becoming into better balance with demand, and our confidence is increasing daily that we will deliver at least another 45% sequential growth in the current quarter.

In addition based on current booking rates, and new commitments from customers, the March ending quarter will continue to see top line growth and strong drop through. I’m pleased to report that we are quickly converging on profitability and cash generation, again consistent with our own expectations but well ahead of many external projections.

It is now fairly clear to us that we will be profitable and cash positive for the full year FY2010. So today as in August, we are confident that we’re on the right track. Confident that the decisions we made over the past 12 months were appropriate, confident that our financial model is delivering the expected results, and confident that continuing upticks in orders will translate into profits for our shareholders.

We are also gaining added confidence month by month that our business development initiatives that are aimed in the right direction and that they will begin to impact our performance progressively through 2010 and they will have an important influence on Brooks in 2011 and beyond.

Allow me a moment to broadly touch on a couple of these initiatives before turning the call back over to Martin. As you know, customers around the world view Brooks as a leading provider of automation, vacuum, and instrumentation solution. Today our largest concentration of customers is in the semiconductor manufacturing sector, where we are considered a strategic business partner and an extension of our customers’ own engineering, manufacturing, and product support capabilities.

At Brooks our product and business development initiatives are aimed at building on our strong position with both existing and newer customers in the semiconductor space, while at the same time extending our market reach and the impact of our core capabilities into new market segments.

Allow me to give you some examples, during the quarter we both resumed production of existing products, and ramped several new platforms to each of our top semiconductor OEM customers in support of traditional applications.

The design in wins and early positioning we are currently establishing with existing and new customers we believe will be a continuing and growing stream of revenues and contribution in 2011 and beyond.

When companies in this sector develop innovative new damage engineering, advanced metrology, and next generation lithography offerings, they are increasingly depending on Brooks for their automation, vacuum, and instrumentation needs, further solidifying our position in the semiconductor market.

And beyond the traditional silicon semiconductor business, we have also made reference in previous calls to our work in the high brightness LED arena, where we have been a supplier of critical automation solutions for some time.

As HB LEDs move into higher volume, more cost sensitive applications, such as illumination and general lighting, automation is expected to be a key enabling technology and an important product differentiator for our customers.

For next generation LED production tools, our efforts have been increasingly focused on delivering what we call our Brooks Life Cycle solution. Brooks is uniquely positioned to provide customers access to a dedicated concept and design engineering capability, best of [read] critical components, and a seamless and cost effective managed transition from prototype to high volume manufacturing capability of these specially tailored automation solutions.

With Brooks as a automation solutions partner, customers realize they can focus their own resources on process issues, while also reducing their time to market for new generations of products. For Brooks we’re better able to leverage our critical components, systems solutions, and extended factory resources.

Based on current customer commitments to Brooks for present, next generation tools, we expect that the expanding LED market will have a growing and important impact on Brooks later in 2010 and importantly, in 2011 and beyond.

In another area that we believe holds potential, we have made references in earlier calls to our expectations for an important new product family from our instrumentation group. Work continues here and some of the technology at the core of this emerging product family was presented in a series of papers earlier this week at the American Vacuum Society annual technical conference.

The reception we received actually exceeded our own high expectations, further validating our product concepts, and the potential of this game changing technology. The scheduled roll out of the first product offering in this family will be early next year, a slight slip behind our original schedule.

But what has not slipped is our expectation level for this new revenue stream and its potential impact on Brooks’ performance in future years. And finally I should note that as I made reference to the AVS conference this week, our strong participation in this highly respected technology forum is just one more metric reflective of the depth and breadth of our technology group.

Brooks presented five papers, covering innovative work in instrumentation and high vacuum pumping. So as you can see from these examples, we are on track with key investment programs while at the same time managing a substantial ramp in our current core business.

Against that backdrop, Martin will review the financials in more details before opening the call to your questions.

Martin Headley

Thank you Robert, as I mentioned earlier we have 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 will make reference to the appropriate slide.

On slide number three you can see the impact of the significant ramp in semiconductor capital equipment activity with our revenues growing by $20.2 million or 46.1% on a sequential basis. This translated into a $7.9 million improvement in gross profits, a 39.5% drop through, slightly below our targets because of costs in our service business including start up costs associated with our China robot repair facility that came online during the quarter.

R&D spending was slightly lower with seasonally less engineering activity. SG&A expenses were reduced by $700,000 largely the impact of the end to expenses related to our equity investigation related matters. Sequentially we narrowed the operating loss before special charges by $9.1 million.

The revenue recovery was most significantly driven by increased sales to our largest semiconductor OEMs was a result of which semiconductor revenues returned to 79% of sales in the fourth quarter, as shown by the chart on slide number four.

This recovery resulted in three of our OEM customers each representing more than 10% of revenues in the quarter. We have yet to see a recovery in sales into industrial markets and other instrumentation markets.

Many of you will recall that the industrial markets lagged our other served markets in the cyclical decline earlier in the fiscal year and hence the higher proportion of revenues into this market for the financial year as a whole.

Slide number five shows how the revenue and operating profits before special charges bridge from our third quarter of fiscal 2009 to the fourth quarter. This bridge demonstrates the strong gross margin contribution from $19.2 million in additional product sales and $1 million of additional services revenues.

As a reminder the services revenues do not include spares revenues which are included within our product groups. The gross margin contributions from these increases were 41% in the case of our products and an unusually low 20% in the case of our services.

We were adversely impacted by the Oracle implementation, first with additional unplanned costs to support the go live and post go live operations, and secondly we have additional depreciation burden of $700,000 per quarter after switching on the system.

Elsewhere year end adjustments for higher stock option forfeitures from restructuring actions resulted in an $800,000 reduction in stock compensation expenses and the wrap up of the equity investigation matters resulted in a similar $800,000 reduction in SG&A expenses.

Other cost measures contributed a net $600,000 quarter over quarter benefit. Overall the result on $64.1 million of revenues was a $14.1 million operating loss before special charges and is as demonstrated on slide six a [harping] of the adjusted loss before interest, taxes, depreciation, amortization, to $8.7 million.

From a Reg G perspective please note that the adjusted EBITDA reconciliations are provided as a supplement to each of our quarterly earnings releases. Turning to slide seven, there was a limited impact from special charges during the quarter with $0.50 million of restructuring costs, mostly the timing for the accounting recognition of actions determined earlier in the fiscal year.

Interest income and other income saw little fluctuation. We did recognize a small $85,000 tax benefit from the release of a non-cash provision on expiry of an audit period. Also our Japanese joint ventures saw modest expansions in their losses but both are already reporting improved business conditions moving into our fiscal 2010.

Overall the loss from continuing operations improved from $25.7 million to $14.5 million. That loss was $0.23 per share on a fully diluted basis and excluding special charges the loss from continuing operations was $0.22 per share.

Our cash utilization was relatively close to break-even in the quarter as shown in slide number eight. Restructuring cash outflows was $2.9 million, working capital management program produced a net $7.6 million, the most critical element being a reduction in gross inventories of that amount, and all of this resulted in a $3.6 million cash outflow from operations.

Capital expenditures were $0.50 million, dropping off significantly from prior levels following the Oracle implementation. Looking at our critical balance sheet accounts as set out on slide number nine, you’ll notice that cash and marketable securities declined slightly, as projected, from $114.4 million to $110.5 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. In this area receivables performance improved again with a DSO reduction of four days which limited the impact on receivables of increased revenue levels, limiting the increase to $10.3 million.

As previously mentioned gross inventories were reduced by $7.6 million and the days payable outstanding moved out 12 days as payables increased by $10.7 million. Accrued restructuring costs decreased by $3 million. The majority of the remaining accrual relates to leased properties idled a number of years ago.

In the next three slides, I’ll briefly cover our sequential segment performance, on slide number 10 we summarized the sequential results of our critical solutions segment. The top line increased sequentially by 52%, with the strongest growth in our vacuum and atmospheric robot product lines that have the greatest focus in semiconductor markets.

Gross profit before amortization and special charges improved by $6 million as did GAAP gross margins. Gross profit before amortization was 28.5% of sales and GAAP gross margins were 27.1% of sales, still below the mid to high 30% gross margin levels expected when we are closer to full capacity utilization.

In addition to volume drop through we got favorable benefits from significant vacation and paid time off activity taken during the quarter. Operating expenses remained at similar levels on a sequential basis resulting in a $6.2 million narrowing of the segment’s operating loss.

On slide number 11 review the system solutions segment, revenues grew by 74% with solid product growth which was heavily orientated towards the largest semiconductor OEMs and thus most marked in our extended factory business. Gross margins improved by $2.3 million or a 22% increment for every dollar of incremental sales, reflecting both a $300,000 reduction in the 100% margin license revenues, and the lower marginal contribution of extended factory revenues.

This segment also carries significant surplus capacity, most notably in the extended factory business. Operating expenses increased slightly mostly from increased IT cost allocations. The global customer operation results set out on slide 12 shows 7% growth in the pure service business to $13.8 million.

This growth is similar to that we see from our customer service activities with others in the sector. Start up costs in China, mix and materials expediting costs hit gross margins which contracted by $100,000. The loss from the segment was $3.2 million in the quarter.

After a focus [backwards] what do we see moving forward, our thoughts are summarized on slide 13. Bookings increased by 71% on a sequential basis in the September quarter resulting in a $69.5 million order backlog at the end of our fiscal year.

This growth in backlog together with the visibility we have to near-term OEM build plans, have resulted in our projection of a revenue increase for the December quarter of at least 45%. We should see the profits drop through from those revenue increases at around model levels which will result in a convergence of earnings and cash flows of break-even.

Adjusted EBITDA is projected to be positive and although working capital will build slightly the working capital velocity should improve to less then 20% of every dollar of annualized quarter revenue.

With that I will open the call to questions before Robert will close the call after those questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of CJ Muse - Barclays

CJ Muse - Barclays

I guess a couple of questions, first one you talked about March potentially seeing revenue growth as well and I guess was trying to dig a little bit deeper there, can you talk about what kind of rolling forecast you’re seeing from your top OEM customers combined with what you’re seeing in terms of your delivery times relative to their delivery times because it looks like turns business is generally increasing across the board for them and so I guess your visibility into March and possibly June coupled with how quickly once you ship, your customers will ship would be very helpful.

Robert Lepofsky

You’re absolutely correct and I think you’ve heard this in the conference calls of several of our customers, lead times in this industry throughout the food chain are shrinking. Device manufacturers expectations are for incredibly short lead times. Talking about weeks not months, and by weeks I mean six and eight week expectations, not six and eight month expectations.

The implications on us has certainly been a part of the ramp that we’ve experienced and we work incredibly closely with the customer side and as I said, its collaborative between the customer and our supply partners as well.

So short lead times and shorter lead times are the call of the day and we think that this is probably representative of a new paradigm in the business and I think the entire food chain is struggling with ramp and compression of lead time expectation.

As you can see from our numbers this quarter and, the last quarter and this quarter we’re dealing with it reasonably well. That visibility is starting to build in the March quarter. I think that there’s a broad range of customers and therefore there’s a broad range of answers to how far from when we ship do they ship.

But we certainly see the build slots filling with named customers and real commitments.

CJ Muse - Barclays

I guess within that construct then, should we take your March expectations for revenue growth to coincide with March revenue growth at your customers or does that imply June growth to them as well.

Robert Lepofsky

Probably a bit of both and I think in our case in the March quarter we’re also having an expected impact of new platforms. As I said one of the things that’s helping us is the ramping of new platforms in addition to, if you will, just the resumption of output to support existing platforms. And I think the newer platforms again will tend to have a little longer lead times for our customers.

CJ Muse - Barclays

And then second question, when you look at mix going forward, between systems and critical solutions, and clearly the critical solution side carries a higher gross margin, how do you see that trending December and March.

Robert Lepofsky

Clearly the extended factory, that arm of our customers’ facility is going at a very fast clip. Now again they are interlinked for us because our critical components in many cases not all cases, but in many cases its our critical components that are flowing into the extended factory.

So we see a continued strong mix in the extended factory and the critical components come along with that. Its that all in that allows us to have the blended nominal 40% drop through in the business.

Operator

Your next question comes from the line of Tim Arcuri - Citigroup

Tim Arcuri - Citigroup

So you talked about having visibility for sales well in to calendar 2010, I was wondering can you just talk about how you feel like orders could progress. There’s sort of this notion of a looming deceleration for the industry on your order growth, but I guess I’m more thinking on absolute terms how you think it could progress.

Robert Lepofsky

First of all just a point of clarification, we’re, I guess we’re somewhat internally focused so we talk about FY2010 which means the quarter that began October 1 so our first quarter is your fourth quarter if you will.

And so again for us FY2010 means we have a good solid December, that’s very clear to us. We have growing confidence in the March ending quarter and when you get beyond the March ending quarter again, we share the uncertainty that virtually everyone has about the second half.

We see lots of opportunities, we see lots of planning, we understand the dynamic but again as many of our semiconductor OEMs have commented, at the end of the day the magic question is [bit] growth and capacity buys, and capacity buys will fuel the latter part of the year.

For Brooks we are also optimistic about new platforms [and] some of our additional market sectors helping us a bit. As Martin noted we have seen a continued lag in the industrial sector for example. And we would be hopeful that with improved economic conditions into next year, that we’d start to see some pick up of that coming in so that it wasn’t all about the, if you will, technology buys in the semiconductor sector.

So I think you could read all of that as a very high confidence in December, growing confidence in March, and caution post March for our June and September ending quarters.

Tim Arcuri - Citigroup

That’s actually very helpful color, could I ask two other questions, one I guess just near-term, do you have a sense just big growth in December, you’re getting that build in confidence in March, do you think that you could actually get a book to bill that’s above, or are you thinking book to bill could be above one in the December quarter and then actually a second question, this is related to the, you said that your sales could have been a bit constrained this quarter, is there any inventory staging or anything that you are kind of doing that could help alleviate that. Just to make sure you can even potentially hit some upside out of that December quarter.

Robert Lepofsky

Let me take the second part of your question, that’s one of the challenges that our people face. We’ve just come, it was only six months ago that we were at the deep dark bottom talking about a $37 million quarter and really shutting down the supply chains, and burning inventory that we had going into the quarter.

So what’s gone on is the restart of our supply chains and the balance of not letting them get too far ahead. And this is both again related to the lead time demands of customers who are short cycled time and our own objectives of managing working capital and risk if we’re wrong.

So its that what a luminary in this industry said many years ago, managing these companies is the art of one foot on the gas and one foot on the brake simultaneously. And how well you go from acceleration to braking tells the tale of success. And that’s the challenge our people face. It is not a clear rocket ship ride forward but we certainly understand the expectations of our customers and their customers for shorter lead times.

Martin Headley

And in terms of the first part of your question, the book to bill, I think its entirely possible it could be ahead of 100 so around a 100 or slightly better is kind of the color I’d best put on it at this stage.

Robert Lepofsky

And again one of the things, and we always end up just about this time, asking the question, what will the customer behavior between Christmas and New Years. And this year its even more interesting because its on one side the issue of planned shut down, on the other side and industry that’s dealing with a ramp and catching up with the ramp.

So that last week of the quarter which represents 7% of revenues kind of does ultimately tell the tale and believe it or not, in any year, not just this current one where we’re in the middle of an important ramp, in any year, the uncertainty goes right into the middle of December.

So that again will not change demand, but might actually move it from the December ending quarter into the March ending quarter. So that’s another piece that you just of, how you think about the two quarters sequentially. But the trend line for the two continues upward.

Operator

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

Ben Pang - Caris & Co.

Two questions, first going back to the question in terms of what your readiness is to meet this ramp, you commented that there were some shortage towards the end of the quarter or you had, customers were pushing to the next quarter, is that for both lines of your semiconductor business.

Robert Lepofsky

Its for everything that we have. It effects our extended factory activities, from their supply base. It effects our critical components and solutions area. It effects our own systems group. So again, we’re pleased and at the progress we’ve made to be able to in fact continue this ramp, 45% followed by another 45% plus growth after that.

We’ve kept all of our customers reasonably happy. We have not been in the situation where we have caused production line downs for any of our OEM customers, but it’s depending on particular products, it can be day by day as we do the juggle and continue to be responsive.

I think across the board our customers are generally happy with us but certainly our normal unquestioned responsiveness has been challenged a bit in the last quarter. Again, we have performed and we’re gaining back to the stability level as our supply chain is more in sync with our demand.

And again, the last piece for us was we did get caught with our system conversion which just came at an inopportune time in the September ended quarter.

Ben Pang - Caris & Co.

My second question is you commented a little bit on the industrial being still down, generally after the economy recovers, the GDP growth starts to recover in the economy, when would you expect to see your industrial start to grow again.

Robert Lepofsky

We don’t have a solid answer for that and the reason is the applications in what we call the industrial sector are so broad that the individual dynamics really vary and they’re broad both by application and by geography.

Operator

Your next question comes from the line of Patrick Ho – Stifel Nicolaus

Patrick Ho – Stifel Nicolaus

Two questions, first one is with most of the restructuring behind the company, what is the biggest variable for the company on the gross margins line.

Martin Headley

The biggest variable is the mix of business. As we’ve noted before this ranges on a variable contribution from our extended factory business that has a variable contribution in the mid 20’s or so to some of the higher end product lines in our critical solutions group that have variable contributions nicely into the 50’s.

So that mix element can be somewhat significant for us. And so that then drives down, you’ve got to take the absorption off the variable contribution piece.

Patrick Ho – Stifel Nicolaus

And my second question, in terms of your new market entries like solar and LED, what do you believe will be the drivers for 2010.

Robert Lepofsky

For us as I noted LED is very important. We have been a participant in that business but we are very engaged with a range of customers for new platform development, next generation platform development, which places a high level of focus and premium on automation solutions.

And those new platforms will emerge to the market in calendar 2010 and have a growing impact on us that’s quite, we hope quite substantial.

Patrick Ho – Stifel Nicolaus

And do you think the revenues from the customer wins will be the ones that you’ve established in 2009 or do you think these are additional share wins in 2010.

Robert Lepofsky

Both.

Patrick Ho – Stifel Nicolaus

And just a last follow-up, where do you see the solar business as a percentage of revenue at the end of 2010.

Robert Lepofsky

Solar for us is still very small. Our participation in solar is principally in our vacuum pumping area and when you look at the number of lines that are being built or installed in the context of our total business, solar remains a fairly small portion of our business.

Operator

Your next question comes from the line of Satya Kumar - Credit Suisse

Satya Kumar - Credit Suisse

You indicated strong sales growth into calendar year 2010, can you kind of break into what you are expecting for growth in your customer operations and what kind of growth from your new products.

Martin Headley

I think we would see that the growth in our customer operations will be more consistent quarter over quarter in this initial ramp up phase. Its obviously more moderated as compared to the product opportunities but should be more consistent quarter on quarter.

Satya Kumar - Credit Suisse

And also just looking at $95 million revenue level, what kind of OpEx do you expect to maintain now.

Martin Headley

We would see modeling operating expenses at something very similar to our fourth quarter levels going forward. We’ve no major drivers up and down, there are variables going on, additional things we put in, efficiencies we take out. The best modeling way to look at it is kind of pretty much a run rate.

Robert Lepofsky

As we said before the changes in the restructuring that we did were of a permanent nature and so as our revenues are rising we are not having the impact of cost coming back into OpEx.

Martin Headley

There’s very little variable cost in there, most a fixed cost base.

Operator

Your next question comes from the line of Hari Chandra - Deutsche Bank

Hari Chandra - Deutsche Bank

On the new products, do you expect new products across all segments, [inaudible] meaningful percentage of sales in fiscal 2010 or is it going to be a fiscal 2011 event.

Robert Lepofsky

Much more significant in 2011 but impact in 2010 and 2011.

Hari Chandra - Deutsche Bank

And on the margins, do they carry better margins.

Robert Lepofsky

In almost every case the answer to that is yes.

Hari Chandra - Deutsche Bank

And a couple of maintenance questions, bookings backlog, do you have the numbers for the quarter.

Martin Headley

As I said, the bookings which were up 71% were $80.8 million and as I made reference in my call, the backlog was $69.5 million at the end of the quarter.

Hari Chandra - Deutsche Bank

And one last question on fiscal 2010 your confidence is basically in the front end loaded based on what you see, how do you see the second half tracking even if there is a fall off, is there a possibility for you to track somewhere in the $70 to $80 million per quarter.

Martin Headley

I’m kind of, the $70 or $80 million—

Hari Chandra - Deutsche Bank

In terms of sales.

Robert Lepofsky

No, if you sum all of our elements of our portfolio, we do not see scenarios where we backtrack to those levels.

Operator

Your next question comes from the line of Timothy Summers - Newbridge Securities

Timothy Summers - Newbridge Securities

Just a couple of things here, you mentioned that the December quarter looked like it was strengthening, is it strengthening at the expense of the March quarter meaning some customers are pulling business in from the March quarter into December.

Martin Headley

I don’t think that that’s happening. I don’t think its being pulled forward, I think people are meeting those demands but equally as we made suggest, suggest that we’re seeing continued growth which suggests there’s a continued buoyancy.

Timothy Summers - Newbridge Securities

Okay so the build plans for the March quarter are not declining even marginally.

Robert Lepofsky

What we’re seeing at our level of business across a broad range of customers globally are new requirements entering the order book each week.

Timothy Summers - Newbridge Securities

And then just as a follow-up, you mentioned that you were supply chain constrained, did you see any additional expenses in the September quarter or do you anticipate any in the December quarter to increase the production or get the components to your customers on a timely basis.

Robert Lepofsky

I think that all of that is again baked into our model of the targeted 40% drop through. To the extent that we do spend a little bit of money that might constrain the upside.

Operator

Your next question comes from the line of David Dooley – Steelhead Securities

David Dooley – Steelhead Securities

Congratulations on guiding back to profitability here, I had a couple of questions. You talk about visibility into March, I guess that means because you’re filling up your slot plans, could you talk a little bit more granularily about, are you 80% or 90% booked in March versus your slot plans, or how are you able to project this visibility.

Martin Headley

The projection of the visibility is based upon what we’re seeing in terms of major OEM build plans rather then necessarily how that translated into our own slot plan filling. Because we have such rapid turns we would not expect to have significant particular slot plans filled at this juncture.

We’re talking as Robert made reference to that there’s a lot of our product is within a 45 day lead time. But it’s the tone and tenor of the OEM’s projections that forecast builds which aren’t necessarily in our slot plans at this juncture.

Robert Lepofsky

Said another way, we’re in the wonderful position of having a range of customers showing up at our door engaging in conversations about new orders that they have received and our requirements to support their new orders that they have received.

David Dooley – Steelhead Securities

And you mentioned you had three 10% customers during the quarter, could you throw up the percentages to us, and then as a strategic question, I think yesterday one of your top customer mentioned another major restructuring and I’m wondering if that restructuring, does that mean if there’s incremental business coming to Brooks Automation.

Martin Headley

In terms of the largest customers, we don’t normally disclose the absolute amounts. They are over 10%, those three are Applied Materials, [Lamb and Barient].

Robert Lepofsky

To your second question, the one element that our customer referred to yesterday within his restructuring plan was his move to Asia and the Asian supply chain. We have actually been a participant of that. That’s been part and parcel of our work of bringing up our Wushi facility, and ramping our Wushi facility in support of that and other OEM requirements.

So the restructuring activities as it impacts us is in fact consistent with work we’ve been doing with that customer now for some time.

David Dooley – Steelhead Securities

So is that saying that over time you’re going to continue to benefit from that customer, outsourcing more to you.

Robert Lepofsky

We certainly hope so.

Operator

Your next question is a follow-up from the line of CJ Muse - Barclays

CJ Muse - Barclays

Just a quick follow-up on the OpEx side, I think you talked about flattish OpEx for the December quarter and so I just wanted to confirm, around $26 million is what you’re thinking.

Martin Headley

That’s exactly right, yes.

CJ Muse - Barclays

And then as we, depending on taking revenues up thereafter, what kind of growth could we see.

Martin Headley

I think we’re saying really no growth at all. We still have initiatives to further improve process and cost in our operating expenses equally recognizing that we will also have initiatives that add some cost and the best way of looking at it is we believe that we manage that to a steady state basis from now outwards, recognizing that its mostly a fix cost base.

There’s very little in there that’s a variable cost element.

CJ Muse - Barclays

I guess at what point though do you bonus accruals, things like that start to drive it higher.

Robert Lepofsky

Again, we actually have a different approach to variable compensation and we actually have a program that focuses through the cycle on the requirements at different points in the cycle. Said another way, we have variable comp during the down cycle as well as the up cycle based on the target performance that we expect.

So again, we won’t have growth because we had variable performance in the last year. We’ll have variable performance in the next year. The thing that changes is what are the metrics and the measures to trigger those payouts.

CJ Muse - Barclays

So are you saying that those costs are more in the COGS line item.

Robert Lepofsky

Well both COGS and G&A, right across the board.

CJ Muse - Barclays

So you’re saying it’s a variable cost model, but you’re also saying that your OpEx will hold flat through, at whatever revenue rate. I don’t see how both can happen.

Martin Headley

Its not a variable cost model, it’s a model based upon specific performance attributes. I think what Robert was saying is that there are elements of those costs that go during the down cycle and the up cycle, so its not the big swing factor that you would see may have seen, in the past.

Robert Lepofsky

Just for clarification, so during this past year we didn’t reduce salaries other then the five senior executives and the Board. So across the company we didn’t reduce salaries. So they don’t come back. As I suggested earlier what we refer to as performance based variable comp you might refer to as bonuses, we accrue and pay that even during the downturn but against very different metrics.

CJ Muse - Barclays

And I guess in terms of thinking about incremental operating margins, the target 40%, how do we think about I guess the different contributions in terms of mix, is that not an issue or something that we should think about in terms of adding potential volatility, one quarter in, one quarter out.

Robert Lepofsky

Well again you see that what we’ve said is not for clarification of 40% operating margin, but 40% drop through on every incremental dollar of sales. That’s a blended number that we’ve tested across a mix of business in our broad portfolio of solutions. And just as in the quarter just ended, it was a couple of points above 40% because we had a favorable customer product mix.

We think that that’s the right place. Could it go into dip to the high 30’s if we had a very, very high mix in our extended factory, absolutely. But nominally we’ve said you can model our performance and we’ve been demonstrating that now for a couple of quarters, you can model the performance at essentially 40% drop through and that will be a good number all in for Brooks.

CJ Muse - Barclays

And I guess one quick question, tax provision should be a couple hundred thousand a quarter.

Martin Headley

Yes, probably around that level, nearly all non-cash.

Operator

Your next question is a follow-up from the line of Timothy Summers - Newbridge Securities

Timothy Summers - Newbridge Securities

Just a follow-up, as you look at fiscal 2010 how do you see your global customer operations business doing. Obviously the growth is lagging the hardware business which should be expected at this point in the cycle but are we going to be seeing an acceleration in that revenue growth.

Robert Lepofsky

We expect that again through the year and there are really two elements of it, one is increased activity with the customers and the second one is increased market share, whether that market share comes from directly taking business away from a competitor or with new and expanded relationships in the industry.

And we have spoken in prior calls about expanded relationships with major OEMs particularly in the robot repair area.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Robert Lepofsky

In closing let me say again our people and our business partners are working very hard and performing at a high level. We are entering 2010 well positioned to take advantage of current opportunities and establishing important new growth tracks for 2011 and beyond.

Having navigated through the treacherous 2009 downturn, at this time we’re pleased to be focused on the ramp and on our longer term prospects. That concludes our call for today and we thank you for your time and for your participation.

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Source: Brooks Automation, Inc. F4Q09 (Qtr End 09/30/09) Earnings Call Transcript
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