Brooks Automation's (BRKS) Stephen Schwartz on F2Q 2014 Results - Earnings Call Transcript

May. 9.14 | About: Brooks Automation, (BRKS)

Brooks Automation, Inc. (NASDAQ:BRKS)

F2Q 2014 Earnings Conference Call

May 8, 2014 5:00 PM ET


Lindon Robertson - EVP and CFO

Stephen Schwartz - CEO


Patrick Ho - Stifel Nicolaus

Ben Pang - Northland Capital Markets

Farhan Ahmad - Credit Suisse

Jairam Nathan - Sidoti and Company


Welcome to the Brooks Automation Quarter Two Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded Thursday, May 8, 2014.

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

Lindon Robertson

Thank you, Jamie, and good afternoon everybody. We'd like to welcome each of you to the second quarter financial results conference call for Brooks, fiscal 2014 year. We will be covering the results of the second quarter ended on March 31st and we'll provide an outlook for the third fiscal quarter ending June 30 of this year.

The press release was issued after the close of the markets today and is available at the Investor Relations page of our website, as are the illustrative PowerPoint slides that will be used during the prepared comments during today's call.

I would like to remind everybody that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements.

I would refer you to the section of our earnings release titled Safe Harbor statement, the Safe Harbor slide in the aforementioned PowerPoint presentation on our web site and our various filings with the SEC, including Form 10-Q for the first quarter ended December 31, 2013. We make no obligation to update these statements, should future financial data or events occur that differ from forward-looking statements presented today.

I would also like to note that we may make reference to a number of non-GAAP financial measures, which are used to in addition to and in conjunction with results presented in accordance with GAAP. We believe that these non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with the GAAP financial results and the reconciliation of GAAP measures, provide a more complete understanding of the Brooks business. Non-GAAP measures should not be relied upon to the exclusion of GAAP measures.

On the call with me today is Brooks' Chief Executive Officer, Steve Schwartz. We will open with his remarks on the business environment and our second quarter highlights. Then we will provide an overview of the second quarter financial results and a summary of our financial outlook for the quarter ended June 30, which is our third quarter fiscal 2014. We will then take your questions. During his prepared remarks, we will from time to time make reference to the slides available to everyone on the Investor Relations page of the Brooks website.

With that, I turn the call over to Steve Schwartz.

Stephen Schwartz

Thank you, Lindon. Good afternoon everyone and thank you for joining our call. Since our last quarterly call, we have made much progress in the continued transformation of the company, and will elaborate on the key milestones in my remarks today.

First, a little bit about the March quarter. We booked $142 million of orders in the quarter, powered by a record $34 million of bookings from our Life Sciences business unit. Revenue was $133 million, up 7% quarter-over-quarter, with almost all of the increase from a strong selling in front-end semi.

We had some key design wins in semi and we continue to establish ourselves in Life Sciences with an extremely important win, that validates our aggressive approach and the value of our new product design.

We generated $27 million of cash from operations and built our cash position to more than $190 million, and we still have no bank debt. We anticipate that our cash position grow again in the June quarter, and will leave us in an even stronger position to continue to invest in more growth opportunities for the company.

We also announced some meaningful changes to our products and capability portfolio, in the form of the pending divestiture of one non-core business unit, the acquisition of a company in the semiconductor equipment space, and a strategic investment in a Life Sciences company. We believe that each of these moves will generate significant shareholder value, and we are confident that these investments will drive more growth in the coming years.

I will now discuss some of the specific highlights since our last call, and put more color on the strategic moves we have recently announced, then before I turn the call back over to Lindon, I will give some commentary about how we see the next quarter shaping up.

As we mentioned on our last call, we continue to make significant investments in R&D, and as our OEM customer base continues to consolidate, we are focusing even more on the larger OEMs and IC makers. Towards that end, we recorded design wins at two tier-1 OEMs, both were vacuum robot wins, one for the Mag 7 and one for our new Mag 9 robots. These OEM products achieved the same market share, as the tools they are meant to replace, each of these platforms are expected to drive demand for hundreds of units per year.

We had two new vacuum system platform wins for new tools at a Korean OEM, who was already a customer of our vacuum systems. These two wins were for tools they have developed for new deposition processes.

In adjacent market applications, we had one win for a high capacity robot, which will be used in a new LED-MOCVD system and we won two atmospheric systems, for advanced packaging applications.

Additionally, we won a new lots order design at a top tier IC maker. I remind you that a majority of the revenue we get from the Crossing Automation product lines comes from end users. This is also the same for the new DMS product lines we acquired, so we will have the benefit of leveraging our sales account and sales service infrastructure, as we expand our business with IC makers.

We have reported regularly on our OEM design win activity, but its important to pause occasionally to reflect on a summation of these quarterly victories. Specifically, I want to call attention to the performance of our vacuum robot franchise, which has been leading the industry for more than 15 years; and although it is established as a work force family of products, we have continued to improve performance, so that these products meet the cleanliness, reliability and productivity demands of each new device generation. This persistent innovation and product improvement has led to higher volumes of tool designs at new equipment companies, and because we have invested significantly to be out in front of the demands of our largest OEMs and their customers, we are gaining meaningful share at these accounts, as we displace more of their internally designed and developed vacuum robots.

This process and the proofs that are necessary take time and significant R&D spending, and we are beginning to see the real results from these close partnering activities and our significant development efforts.

To demonstrate this point, when we compare our vacuum robot revenue in the first half of 2014 with the first half of 2013, we were up more than 100% year-over-year, and we forecasted our vacuum robot business in 2014 will be up considerably higher than any forecast for the front-end equipment market growth, an indication of strong market share gains for this important segment.

A continued rebalancing of our product portfolio to focus on products where we add high value, like vacuum robots, remains a strategic priority for us, and we believe that we are making great strides in this area. You can expect that we will be making similar investments in R&D, as we have learned sometimes the hard way, that there is considerable pay off only, by being out in front of customer requirements. Now we are more fully engaged in our customer's next generation product development, and we are ready to deliver new products with new capabilities in shorter cycles than ever before.

In the same band, we will continue to invest in market opportunities where we can both lead and grow. We have been successful by doubling down in market opportunities to take advantage of our core technical capabilities, and leverage our existing sales and service infrastructure. At the same time, we do not believe we have the opportunity to both lead and grow in a market, we will take action.

It is this portfolio of appraisal process that led to our divestiture of the contract manufacturing business three years ago, and more recently, our decision to sell the Granville-Phillips product line.

In March, we announced the sale of our Granville-Phillips business unit to MKS Instruments. Granville-Phillips was acquired by Helix in 1998 and became a part of Brooks, when Helix and Brooks merged in 2005. Since that time, GP has been a steady, profitable business. While Granville-Phillips was a part of Brooks, our team faithfully maintained these products and did a tremendous job to continue to build the strength of the brand of these outstanding vacuum gauges.

However, we also concluded that even though GP was profitable, it was not core to our business. We were the number three provider in the vacuum gauge, and we determined that without additional scale and significant investment, it would be difficult for us to grow this business, which has been at approximately the same revenue level for the past five years. We did not have a good path to improve on this position or to make it fit into our growth strategy. We believe that MKS Instruments provides an excellent home for this business, and we look forward to the successful closing of this transaction, some time this quarter.

Furthermore, its our intent to use the proceeds from the sale of this valuable asset to invest in other opportunities that are better aligned to our product and business strategy, and that will bring better return to our shareholders.

Towards that end, last week we announced the acquisition of Dynamic Micro Systems, a very capable automation equipment company, specializing in various carrier cleaning and storage products. For many of you, DMS is a new name, but they are well known to IC makers, as they have a long legacy of providing many important semiconductor automation products, including reticle stockers, lot sorters and wafer carrier cleaners, to mention just a few.

We have been close to DMS for some time and we have witnessed the evolution of their FOUP cleaning products from manual devices into fully automated FOUP cleaners, that are rapidly being accepted and utilized for 20 nanometer device production lines.

During this period of 2012 through mid-2013, they shipped a total of three units, and as they have been able to prove the capability of this system, they shipped more than 20 units in the last two quarters, a testament to the acceptance of this critical capability. The 2013 revenue reported for DMS was approximately $28 million, approximately 70% of the revenue over that period came from their new automated cleaner products, and most of that, was the top five IC makers.

We are positive about the growth prospects for this business in 2015 and beyond, and more significant control over airborne molecular contamination becomes even more critical, at and below 20 nanometer.

In addition, all trends for future manufacturing requirements like smaller design rules, 450 millimeter wafers in the UV lithography, further compound the need for cleaner carriers.

We have already begun to integrate the DMS team into Brooks. We have identified approximately $4 million in annual synergies that will be recognized by this time next year, and after a slight hit to our June quarter earnings results, we plan to make steady, sequential operating profit improvements beginning at September, and we believe that this deal will be accretive by mid-2015.

We are enthusiastic about the addition of this key product technology, because of the strong fit with our semi product roadmap, and because it provides us with a new growth opportunity in a market segment where we are already the clear leader.

As you can tell, these are moves leading us toward bigger opportunities that are better aligned with our strategic direction, and then also give us a chance to lead in the segments where we participate. We have a stronger and more defensible position in semiconductors, and we will keep driving to make the most of this position, especially as the industry forges into the sub-28 nanometer device territory.

Now I’d like to give commentary about Life Sciences, where we had a truly outstanding quarter, as we have gained traction and confidence in our position, and the potential that's coming from this new market opportunity.

As I mentioned before, bookings in the Life Sciences business were $34 million in the quarter, an all time record. In the quarter, we achieved key milestones related to some high profile bio banks. If you recall, one year ago, we announced that we had won automated cold stores at Tohoku University in Japan, where population bio bank was being established to study the long term effects of potential health problems, associated with the earthquake and tsunami in the Sendai area. We installed these systems in the March quarter, and we anticipate that we will reach technical sign-off and revenue in the June quarter.

Additionally, we were selected to supply all eight stores for the U.K. Biocentre, which is an enterprise that is jointly managed by U.K. Biobank and the University of Oxford. The stores are scheduled to be fully commissioned over the next four quarters, and we support it with a multi-year service contract.

We are extremely pleased to have been selected for this high visibility program which is known around the world. This win is particularly gratifying, as the business was quite competitive, and we were not one of the two suppliers who were the incumbent storage providers for the original U.K. Biobank site, which started up some six years ago.

In terms of financials, revenue for the Life Sciences business was $12.6 million, up approximately from the prior quarter and where we had expected it to be. Gross margin was 41%, down 600 basis points from Q1, but above our corporate average gross margin and within the range of expectation for the Life Sciences business at these revenue levels. The year-to-date gross margin for the first half of fiscal 2014 is 44%.

We have indicated, that at an annualized revenue rate of app $100 million, we would expect gross margin for Life Sciences to be around 45%. So to be at 41%, half that run rate, is consistent with our plans for this business.

In the first two quarters of fiscal 2014, we had booked $54 million of new orders, which is in comparison to the $43 million of revenue that we have for all of fiscal year 2013. Necessarily, we are going to begin to ramp revenue meaningfully in the June quarter, and we anticipate revenue will be app $19 million, and even though we will continue to invest at a high level for R&D, we expect to be close to breakeven in the quarter. Our target had initially been to be able to break even in the Life Sciences business in the December quarter of 2014, at a revenue level of $16 million. While achieving break even is important, we are still spending on improvements to current products and new product development in the June and September quarters, where you will see some decrease in Life Sciences spending beginning the September quarter, and continuing into December.

We are particularly pleased with the momentum we have achieved in the Life Sciences business, and although we do not expect a $34 million in bookings to repeat again for a while, is a testament to our market position and the potential that exists in this important and rapidly growing segment.

You should expect that we will continue to invest to expand our product portfolio to capture business in more segments of this important cold chain of condition, and that these investments will include organic new product development as well as acquisitions.

Along those lines, I'd like to comment briefly on the equity investment we made in BioCision, an exciting fast moving California based company, that has developed some important tools for the protection, controls cooling and safe transport of cryogenic samples. The BioCision products are innovative and important products that are being written into operating procedures for the handling of samples, that require a known and validated cold chain of condition. These products link directly with our mission, to be able to deliver high quality samples to known history and origins to point of use.

We anticipate that our partnership will help both of us to advance these critical handling protocols and qualify equipment for these protocols. We have already started to engage in product development, and are formulating plans to help each other in distribution and definition of products that can be used as part of our automated storage and transport offerings.

Before I close, I'd like to mention a bit about the progress we have made on our operating model. We continue to driver our operating improvements initiatives, but after four consecutive quarters of sequential increase, we did have a slight pause in our positive gross margin trajectory in the March quarter.

That noted, we did record a 60 basis point increase in gross margin in our VTS business, which has been the focus area for most of our gross margin initiatives. So this good work continues to pace. However, mix issues and a 600 basis point reduction quarter-on-quarter from Life Sciences took overall gross margin down slightly. We continue to drive significant gross margin improvement initiatives and we expect to resume our quarterly improvements again in the June quarter.

Also, as we have now started to gain traction in our Life Sciences business, we are more assured in our plans for a more cost effective structure for this business unit, and we are preparing to take actions to restructure some of the footprint, and reduce redundancy in this segment. This will allow us to decrease the operating costs associated with this business, but will also cause us to incur some restructuring charges in the June and September quarters, as we reconcile our infrastructure and begin to make this business more efficient. Our continued growth in this business will come from organic product development, and by acquisition, so its incumbent upon us to be able to grow and manage the operating costs efficiently.

Now I will give some additional comments and outlook for the June quarter. We experienced another growth quarter in semi in March, but consistent with other companies that have already reported results, we anticipate that VTS revenues in June will be off by about 15% to 20%. Our service business is projected to be app flat, but this quarter we forecast that our Life Sciences business revenue will increase by app 50%, and that gain will offset much of the effects of the slowdown in semi.

Additionally, the June quarter results will contain partial quarter contributions from Granville-Phillips and DMS, but we feel that the relative benefit of these moves will begin to be clear, when we report our September quarter, then we will give some detail of the anticipated results of these moving pieces.

We have made some important strides in the alignment of our strategy and our capabilities. We are pleased with the milestones we accomplished over the last three months. We are confident in the cash generating capability of the company, and our ability to grow in the important markets that we serve. We remain positive about our growth prospects in 2014, and we are in the best position to make the most of the opportunities that we have created for ourselves.

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

Lindon Robertson

Thank you, Steve. And I refer you to the PowerPoint slides available on the Brooks web site. I draw your attention to slide 3; as Steve referenced, we entered a definitive agreement to sell our Granville-Phillips business and we expect us to close within the third quarter. Consistent with GAAP, we will treat the Granville-Phillips business as discontinued operations in our 10-Q or the report on the second quarter. This treatment is also applied on a pro forma basis in the prior periods used for comparisons.

So on this page, you can see our second quarter results in two views. The aggregate view at the top, combines continuing operations with the discontinued operations of Granville-Phillips, so that you may see it compared to our past historical reference and our prior guidance.

When including Granville-Phillips, revenue expanded 7% and exceeded the top end of our revenue guidance range by $3 million for the quarter. The non-GAAP earnings per share on this aggregate view was $0.08 per share, consistent with the guidance. I will address the performance drivers in a few moments.

In a continuing operations view, you can see the GAAP reported revenue and EPS. In this treatment, the Granville-Phillips is excluded from the revenue gross margin and other detailed lines of the P&L. However, the net income from the discontinued operations is reflected as a single line item, and therefore it is in the GAAP diluted EPS. On this basis, excluding the Granville-Phillips business, revenue expanded 7.5% compared to the first fiscal quarter. For the non-GAAP view of continuing operations, we have removed certain charges, including restructuring and amortization, as well as this income from the discontinued operations.

On slide 4; we display the aggregate view of the second quarter results, including Granville-Phillips. In this view, revenue expanded 7% compared to the first quarter, and exceeded the midpoint of our prior guidance by $5 million. Adjusted gross profit for the quarter was 36.6%, compared to 37.2% for the first quarter. A decline was driven by lower margins in Life Sciences, however at 40.6%, Life Sciences was within the range of expectations. Operating expenses increased as anticipated in the prior guidance, primarily driven by stock compensation and incremental payroll taxes incurred in the first calendar quarter.

Turning to slide 5; Granville-Phillips is broken out in detail for you, as $7.5 million of revenue and $1.2 million of net income, a divestiture removes $0.02 diluted earnings per share from our business.

As explained earlier, the income from discontinued operations is included as a single line item in the GAAP results in the right hand column. For the non-GAAP view of continuing operations, we remove this income, so that you have the appropriate baseline moving forward into the third quarter. We are using this view of continuing operations for the remainder of our presentation.

Turning to slide 6; we summarize the total business performance on a continuing operations basis. You will observe the same performance dynamics as described earlier, but just slightly different numbers. Revenue shows an increase of 7.5%; adjusted gross profit margin in this view declined 40 basis points, driven by the lower Life Sciences margins, as I referenced earlier. The second quarter bubble in SG&A expense includes the incremental stock compensation in the first calendar quarter impact of payroll taxes. In total, the operating margin percentage held and operating income expanded to $5.8 million in the quarter.

Segment revenue performance on slide 7, shows the strength that the Product Solutions business drove, with $8.3 million of our $8.8 million growth. In total, we grew 8% sequentially and 15% year-over-year. We were pleased to see each element of our business showing growth this quarter on both comparisons.

On slide 8, we show the results for Brooks Product Solutions. Total revenue for the second quarter was $90 million, up 10% from the first quarter and a 14% year-over-year increase. We saw double digit growth in both the semi front end manufacturing and the industrial segment.

Gross profit margin was up in the March quarter, coming in at 36% compared to 35.5% in the first quarter. This is 410 basis points higher than the same quarter one year ago. Improvement in gross margins had come from lower cost materials and warranty and also higher absorption of fixed costs for the volumes.

On slide 9; revenue in our Brooks Global Services segment was up slightly compared to the prior quarter, coming in at $23.4 million. This is a 7% increase year-over-year, after absorbing the additional stock compensation of payroll taxes and operating expense, the segment reported operating profit of $2.4 million.

On slide 10; you can see the results from our Life Sciences segment. Revenue grew 3% sequentially to $12.6 million and we had a record quarter for new orders booked at $34 million. The win with the U.K. Biobank for $15 million was the largest in our history, and we believe it to be the largest in the history of the industry.

Consequently, we ended the quarter with $46 million of 12 month backlog. Adjusted gross profit margin came in at 40.6% compared to 47% during the first quarter. As shared in past calls, we expect Life Sciences gross margins to be in the range of between 40% to 45%, and are pleased with our performance this quarter.

Slide 11 shows GAAP net income for the second quarter of fiscal 2014 up $2 million or $0.03 per diluted share, excluding amortization of $1.6 million, restructuring of $0.5 million and acquisition costs, non-GAAP net income was $4.3 million or $0.06 earnings per diluted share.

Our cash position is shown on slide 12; adjusted EBITDA of $13.1 million and improved working capital of $16 million drove $27 million in operational cash flow. The drop in working capital was driven by advanced collections in our Life Sciences business. On a year-to-date basis, we have generated $36 million of operating cash flow and have increased our cash position by $19 million to finish the first half, with $192 million of cash, cash equivalents and marketable securities.

For clarity, this balance does not yet reflect proceeds from the sale of the Granville-Phillips for $87 million, nor the cash payment of approximately $37 million in the acquisition of DMS.

Slide 13 displays the balance sheet. You can see the assets held for sale of $28 million from the net assets of Granville-Phillips. This was primarily goodwill on inventory. We capitalized $8.5 million on property, plant and equipment, as we committed to exercise the purchase option as part of a lease renewal on our -- for a building here on our Chelmsford campus.

As noted in the cash flow, the deferred revenue balance of $33 million reflects the prepayments from Life Science customers, and drives the improved working capital. Cash flow was also supported with improved inventory turns of 3.5 compared to 3.3 in the first quarter.

So let's turn to slide 14; on April 30, we closed the acquisition of DMS, and we paid $31 million plus $5.9 million or a preliminary working capital adjustment. Results of DMS will be reported in the Brooks Product Solution segment. The automated FOUP cleaner complements our automation portfolio nicely, and we anticipate a ramp to $40 m n of revenue in 2015.

We will see approximately $0.03 earnings per share drag in the third quarter. This will improve by Q4, and will begin driving a positive non-GAAP profit in the first quarter fiscal year 2015. By 2016, we expect $4 million of cost synergies, as we leverage the existing Brooks infrastructure, and by 2017, we foresee and ROIC in the mid to high 20s in this business equation. This is another transformational shift in our portfolio.

Moving out of the stable instruments business for $87 million and into the growth space of clean technology requirements for the fab, for a $31 million purchase price. The excess cash will be set aside for further strategic investments.

Turning to slide number 15; we provide our second quarter results on a continuing basis, as well as second quarter including Granville-Phillips. In the right column, you will notice that we expect our third quarter of fiscal 2014 total revenue to be in the range of $115 million to $119 million. As Steve described, we see a significantly softer quarter in the semi front end manufacturing segment. However, we will have a robust Life Sciences quarter, expecting deals about $19 million of revenue, or a 50% sequential growth. We expect our total gross profit margin to sustain the current levels, which reflects improvement in our base business, offset with the cost from the DMS acquisition.

Non-GAAP EBITDA is expected to be in the range of $7 million to $9 million. Non-GAAP EPS from continuing operations is expected to be in the range of $0.01 to $0.04.

That completes our prepared remarks, and now I will turn the call back over to Jamie for questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question comes from the line of Patrick Ho with Stifel Nicolaus. Please go ahead.

Patrick Ho - Stifel Nicolaus

Thank you very much. You noticed that the DMS acquisition will be accretive in the first half of your fiscal year 2015. What are some of the actions you need to take to get that business to be accretive to the overall business model? Is this just simply restructuring, and eliminating some duplicate costs or are there other types of, what I would consider, major moves like a manufacturing shift, product development, rationalization, that's going to help you get to that accretion level that you are talking about?

Lindon Robertson

Patrick, I think you're really tuned in to what it takes to take on a new business like this. Obviously the first thing we need is the revenue, and so -- but to get the accretive step into the first half, this is about absorbing the business. There is a transition. There is infrastructure in that business that we already have, and so we will be eliminating some of that. But we also have some synergies that carries on into 2016, as we said, that will produce about $4 million of benefits to us, in sharing our infrastructure. As you said, rationalizing further as we move along. And furthermore, we think that their synergies between the sales equation and our existing sales equation with the customers you addressed.

Stephen Schwartz

Patrick, this is Steve. So as Lindon said, there is lot of field overlap between the sales and service, and it looks very much like the infrastructure that's in place to support the cost in automation products. And the company already outsources their manufacturing. So whether or not and how we transition those from one contract manufacturer to other, that's not something that needs to be done, and that gives -- we have a little bit of a time to work through that. So we already have a very efficient model that we like very much, but of course, we have a company capability, that ultimately might allow us to transition into other CMs that we use.

Patrick Ho - Stifel Nicolaus

Great. That's helpful. Maybe moving to the Life Sciences side. You guys are really closer to a really nice quarter in terms of the orders. Can you just remind us again on the revenue recognition policy as it relates to the Twinbank portfolio? Are revenues recognized upon shipment, or are they still dependent on each individual customers' acceptance and sign-offs, and when do you think that transitional curve, because I am assuming most of your semis are based off of shipments. When does that have policy change on an accounting basis of shipments?

Lindon Robertson

That's a great question, and that helps explain why you saw, you know, only 3% revenue this quarter. This isn't unique to the Twinbank platform, this is unique to a customer contract that we signed, and that will just become more explicit, as we referenced about a year ago, we stepped into contracts with Tohoku in Japan and we highlighted beginning of the last quarter, we would be working substantively on that contract, in the mix of other businesses, but -- our other contracts. But some of these contracts and that one in particular was on a completed contract basis, and when you do that kind of contract, you take the revenue, once you have delivered and satisfied.

But predominantly, most of our contracts, we come to terms, industry standard terms, and that usually allows us not to wait for the final steps and we take our revenue on a percentage of completion basis. So this is more of an exception, and so, that's why you are seeing a slower step in ramp towards that $19 million. You only had $12.6 million. We are happy with that. Its where we expected. We foresaw it coming. But the terms of the contact is what really determines this.

So now going forward, what should you expect? You should expect that in general, you are going to have a predominantly percentage of completion basis and we are able to show revenue builds with bookings that you would expect. But its still going to be a little lumpy depending on which contracts we sign and what those terms are.

Patrick Ho - Stifel Nicolaus

Great. That's helpful. And last question for me, and I think you have kind of briefly touched it in your prepared remarks about the services opportunity with Life Sciences. Now that the systems business is beginning to grow, what are some of the potential opportunities on the consumables, the replacements and the upgrade business within Life Sciences, and how do you plan to grow that over time?

Stephen Schwartz

Patrick, we think they are pretty significant historically, if we look at any four quarter period, from a revenue standpoint. About half if systems, and then there is a mix of about 25% of the business, specifically services, and then 25% specifically consumables, and then smaller devices or things that are -- often we consider to be repeat. So there is a -- half systems, and then very significant opportunity on the consumable side, and as we have spoken before, we have a lot of focus on how we continue to grow that business. You can imagine, that when we sell a cold store with capacity for millions of samples, we certainly want to be able to also, half the consumables are still in those samples inside the cold store.

So we think there are significant opportunities, but that's a pretty typical ratio, if you will. 50% systems and 50% other, more granular opportunities, and for repeat business.

Patrick Ho - Stifel Nicolaus

Great. Thank you very much, and congrats.

Stephen Schwartz

Thank you.


Thank you. Our next question comes from the line of Ben Pang with Northland Capital Markets. Please go ahead.

Ben Pang - Northland Capital Markets

Thanks for taking my questions. First, on the Life Sciences, as you book some of these larger orders, is there -- are you seeing some pricing? I mean, do you have to give a volume discount, does that impact the gross margin?

Stephen Schwartz

Ben, I think its -- although the environment is pretty competitive, we have very differentiated products. And I think when you see the kind of market share that we are getting, we are winning about all the significant stores that -- store opportunities that come up. The product is very differentiated, and there is a -- we have [indiscernible] on a little bit, because we can't -- we don't have free rein here, but the pricing is fair, the contracts are competitive, but its weighed certainly on a lot more than price. So that's not the pressure point here. We think we constructed a very different design that meets the flexibility needs for most of these customers, who are uncertain about what their future collections would look like. Its not a single format, and our stores are capable of storing any number of formats. So when they consolidate a large collection, necessarily they have vials and tubes and jars and containers of different sizes and our store accommodates that better than -- far better than any other competitive products.

Ben Pang - Northland Capital Markets

Great. And one question on the VTS; you mentioned, the strength in the vacuum robots and the goal year-over-year? Can you refresh us on what is the share of Brooks versus internally made robots?

Stephen Schwartz

Ben, they are of roughly equal size, just to give you an idea. Its tough for us to know exactly what the share is. We have -- we certainly have a majority of the merchant market, and we continue to make gains by converting the captive supply into Brooks products. So I don't have a good number, but just to give you -- it gives you a rough idea.

Ben Pang - Northland Capital Markets

So if I understand correctly, the non-merchant is equal to the merchant opportunity?

Stephen Schwartz

On the vacuum side, its probably close.

Ben Pang - Northland Capital Markets

Okay, okay. And then the final question is, with the acquisition of DMS, what percentage of the VTS is sold directly to the fabs and not to OEMs?

Stephen Schwartz

Ben one more time? On the DMS products?

Ben Pang - Northland Capital Markets

Well, DMS, I think you mentioned Crossing also sells directly to the fabs, right?

Stephen Schwartz

Yes. So a little bit more than half of crossing; and Ben, we will give you the DMS number, when we have a little bit more DMS revenue. But a majority of the historical DMS revenue has gone directly to the fabs. So we mentioned that 2013 revenue was about $28 million. And those products are mostly sold, directly to the fab, when we have a little bit of our revenue history, we will be able to report that more clearly.

Ben Pang - Northland Capital Markets

Fair enough> Thank you very much.


Thank you. Our next question comes from the line of John Pitzer with Credit Suisse. Please go ahead.

Farhan Ahmad - Credit Suisse

Well hi. This is Farhan, asking a question on behalf of John. My question is on the gross margin study and as you are projecting a very significant improvement in gross margins, moving from 25% to 45%. Can you just talk about what are some of the drivers that are leading to an increase in gross margin, and what are some of the things that you plan to do to improve the gross margins?

Lindon Robertson

Yeah, thanks for the question. It’s a good one to clarify. Really, this is just about absorbing fixed structure, as we pick this up with little revenue at the beginning, and as we ramp the revenue, we are overcoming that fixed costs. The business has been shipping products and taking revenue through the year, and you know, when you pick up a new business from a seller, of course, they shift what they can, and we take this up and start from here. That's why in fact, you will rarely see us give you any guidance one year away, and so we point out the fiscal year 2015, we see about $40 million in this equation and about 40% gross profit margins, and that's the target that we expect to get to, pretty quickly, as we step through next year.

Stephen Schwartz

So Farhan, to put a final point under the products that are a lot closer to 40% today, than they are to 25 -- for the --

Lindon Robertson

Variable structure.

Stephen Schwartz

Yeah, for the shipments.

Farhan Ahmad - Credit Suisse

Got it. So incremental margins are much better, and you're taking the fixed costs as kind of constant, so you can improve the margin. Then in terms of your revenue growth for DMS. What are some of the -- is there any risk to it for FY 2015? What are some of the factors that can cause like upside or downside to that expectation?

Stephen Schwartz

Farhan, it will be fab buildout. So these are tools that go into support, additional capacity. So therein lies the risk.

Farhan Ahmad - Credit Suisse

Okay. So and what sort of assumptions are you making, when you are thinking about like a $40 million run rate. Is this like -- this new fab buildout is at the same rate as today, or is it, like you're expecting, somewhat like 10% pickup or is it like doubling of new fab buildout?

Lindon Robertson

So Farhan, if the fab capacity goes to the WFP, its of the order of 32 billion, then its consistent with that being a $40 million business.

Farhan Ahmad - Credit Suisse

Got it. Thank you. And then, in terms of your Life Sciences, it was very strong bookings. And now that you have had bookings above your billing rate for a while, and you're projecting now your revenues going up to $90 million in the June quarter. How should we think about in the back half of this year? Can we get like revenue run rates in excess of $25 million?

Lindon Robertson

Farhan probably -- with the current businesses that we have, that will be on the high end. But if we are in the $16 million to $20 million range for a couple of quarters, that feels pretty right based on the backlog we have. If incremental business can be pulled in, we could raise that level.

Farhan Ahmad - Credit Suisse

Got it.

Stephen Schwartz

When we talk about the bookings, by the way; sometimes we take orders for things that won't ship. When you quote the backlog, some of the orders that we took are for services revenue, for example, that might be satisfied outside of 12 months.

Farhan Ahmad - Credit Suisse

Got it. And just in terms of, like you have a very strong growth bookings in Life Sciences, and I just want to understand, is there like a big inflection happening here that's driving the change? Is this something happening on the market, that suddenly, that industries are migrating towards the products that you are making, or is it just like a onetime events? We are seeing like a very strong increase in the bookings on the Life Sciences. So just want to understand, like a big picture, what are you seeing?

Lindon Robertson

Farhan, I will do my best here. There is a tremendous growth in the storage of biological samples, that's a known. It’s the conversion, if you will, from manual storage and handling for some of these larger collections to automated systems. So even the people who buy automated cold stores, they all have manual storage systems, which are liquid-nitrogen tanks or mechanical freezers. But what we see is, as they need more capability from the safety and security of the sample, from automated tracking, handling, monitoring, and as they integrate automation and some more of their lab systems, there is a conversion, if you will, during these high growth rate phase, there is a conversion to automated systems. Some of these we know about years in advance. Some, like the Tohoku Biobank was set up very specifically to study a population, and that happened, basically, when the earthquake hit three years ago, this was put in motion, and the store was put into place.

So we see the trend happening where there are more automated systems. But already and for the last 15 years, there has been a significant growth that would certainly -- it certainly has added a lot of storage capacity. But only now, over the last few years, as more and more of the storage moves to automation and then that trend will continue.

Farhan Ahmad - Credit Suisse

Thank you. That's all I had.


Thank you. (Operator Instructions) Our next question comes from the line of Jairam Nathan with Sidoti and Company. Please go ahead.

Jairam Nathan - Sidoti and Company

Hi. Thanks for taking my questions. I was wondering if you could shed some light on the adjacent markets, what was the environment looking like there? Earlier in the year, you had talked about, seasonally these things start picking up -- starting in second and June quarter, so I just wanted to -- what's your take there?

Stephen Schwartz

So Jairam, we had -- I will just give you a couple of data points, and they are small. The backend business was indeed down, quarter-on-quarter, and what we see for the third quarter, for the June quarter, is some recovery, but its really modest. Our expectations are that, by the fourth quarter, it will pick up more significantly. And for example, in the LED space, meaningful on a percentage basis, but still small, in terms of an incremental growth.

So our expectations for Q3 are some recovery so up off the bottom, but still modest gains on a dollar basis, if you will.

Jairam Nathan - Sidoti and Company

Okay. And my next question, the $34 million in orders, if you take out the U.K. Biobank, you still have a significant chunk of $20 million. Were there any big pieces there or was there a mix of smaller orders there?

Lindon Robertson

Generally, normal course. So we had some refurbishments, we had another brand new cold store win, the services component, if you will, was significant. But again, in normal course, out of $24 million, it was just over half was stores, and the remainder was services consumable, and small devices.

Jairam Nathan - Sidoti and Company

Okay, thanks. That's all I had.


Thank you. That does conclude the question-and-answer portion at this time. I will now turn the conference back over to Mr. Schwartz. Please go ahead sir.

Stephen Schwartz

Thank you, Jamie, and thanks to everyone for listening to today's conference call. For sure, we look forward to seeing you at upcoming conferences, and we will update you on the progress of our third quarter conference call shortly. Thank you so much.


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

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