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Brooks Automation, Inc. (NASDAQ:BRKS)

F4Q 2011 Earnings Call

November 10, 2011 4:30 p.m. ET

Executives

Martin Headley – EVP and CFO

Stephen Schwartz – President and CEO

Analysts

Edwin Mok – Needham & Co. LLC

(CJ Nuss)

David Duley – Steelhead Securities

Wenge Yang – Citigroup

Satya Kumar – Credit Suisse

Patrick Ho – Stifel Nicolaus

Ben Pang – Caris & Co.

Operator

Good day, ladies and gentlemen, and welcome to the Brooks Automation’s Third Quarter Financial Results Conference Call. My name is Karis, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today’s call is being recorded.

And I would now like to turn the conference over to your host for today, Mr. Martin Headley,

Chief Financial Officer. Please proceed.

Martin Headley

Thank you, Karis, and good afternoon, everybody. I’d like to welcome each of you to the Brooks Automation fiscal 2011 fourth quarter results call. Our press release was issued after the close of markets today and is available on our site, www.brooks.com, as are the illustrative PowerPoint slides to be 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 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’re going to 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 we provide and additional way of viewing aspects of our operations but, when viewed with our GAAP results and the reconciliations to GAAP measures, provide a more complete understanding of our business.

With me today is Brooks’ President and Chief Executive Officer, Steve Schwartz, who will open with remarks around the business environment and our current initiatives. I will then provide an overview of fourth quarter and full-year fiscal 2011 financials and a summary of our financial outlook for the December quarter, our first quarter of fiscal 2012. We’ll then take your questions.

During our prepared remarks, we, will from time to time, make reference to the slides available to everybody online, at www.brooks.com, which are identified to assist in clarifying our comments.

And with that, let me introduce Steve Schwartz.

Stephen Schwartz

Thank you, Martin. Today I’d like to give a brief update on results from our strategic initiatives and give some commentary as to how we see our December coming together. Fiscal year 2011 in many respects, was a very strong year for Brooks. We drove revenue to $688 million, an increase of 16% from last year, achieved record cash flow from operating activities of $88 million, ended the year with cash and marketable securities of $206 million or $3.17 per diluted share and no debt.

We successfully sold our lower margin Contract manufacturing business, and acquired the businesses that formed our higher margin Life Science Systems platform. Unfortunately, these positive results have recently been over shadowed by the slowdown in semi-conductor capital equipment spending, which has been significant. And consistent with the reports from many of the companies who serve our same customers, we believe that semi-conductor related revenue in the December quarter will be lower than the September quarter.

In spite of this challenging economic environment, we are pleased to report our September quarter Life Sciences revenue was slightly ahead of our expectations, and our integration activities are well under way, although cost reductions and margins on some orders were less than had been projected.

Also, we’ve continued to make progress against our strategic initiatives that we outlined for you at the beginning of fiscal 2011, to gain market share in our existing businesses, to expand in the high growth markets, and to drive gross margin improvements in all of our businesses.

I’d like to spend a moment to highlight some of our design win activity, that’s a result of our RD&E initiatives. Even in the down business environment, we had another strong quarter for wins in our core business and I highlighted a few of those penetrations here. We had six new automation systems design wins, two for Advanced Packaging, two for LED, one for an advance nanotechnically application, and one for a semi-conductor frontend application. And we received orders for three more 450 millimeter systems, two of which were vacuum systems, and one for a front end application.

We are actively engaged in 450 millimeter design activity with another five customers at this time. Although we continue to believe that the market for significant volume of 450 millimeter products is still some years away, we are ready now with products for customer who need automated platforms. We feel that it’s important for us to have developed products in advance of the market needs.

For the entire fiscal year, we recorded a total of 79 new design wins, and we added 18 new customers. We are particularly pleased with the success of our expansion into markets beyond the frontend semi-conductor market segment into what we refer to as adjacent spaces, like active display, LED, MEMS, and advanced packaging.

Revenue from these adjacent segments grew throughout the year to the point where it represented 32% of our September revenue, even slightly ahead of our aggressive internal target. When we include the contribution from our new Life Sciences Systems business, fully 38% of our September quarter revenue was generated from markets other than frontend semi. We are pleased with the aggressive transformation that we’ve been able to achieve, and we’ll continue our investments that are enabling us to gain market share.

This success in adjacent spaces is the result of our adaptation of what we’ve done for large diameter silicon wafers and flat panel display glass, being applied to various other substrates, like smaller scaled glass, small diameter sapphire wafers, silicon wafers that have been thinned to the point of being flexible, as well as high mass pay loads like generation 7 glass and large diameter susceptors.

We have simultaneously been able to expand our served market and capture share along the way. In fiscal 2012, we plan to continue to invest at approximately the same level of RD&E in these core and adjacent markets. But once again, we’ll continue to channel more of these dollars toward new product development and design win activity, and less towards sustaining and compliance for older product lines.

This is a formula that worked well for us in fiscal 2011, and we have an active design and development pipeline to start fiscal 2012. In terms of market diversification outside of the semi and adjacent markets that we’ve served, we’ve finalized our acquisition of Nexus Biosystems at the end of July. We have diligently worked to speed the integration into Brooks. After a thorough evaluation of overlapping skills and capabilities with RTS, which we acquired in April, we are making changes to align a single organization around this market opportunity.

In the September quarter, we took some significant actions to reconcile the worldwide Brooks Life Science System group, and most of the impact of those changes will make their way through the P&L by the end of the December quarter. We continue to be pleased by the market position and the power of our combined RTS Nexus capability. The December quarter will be our first full quarter with Nexus and RTS together, and we anticipate that our Life Sciences System revenue will be in excess of 10% of our total revenue for the quarter; so already a meaningful contributor to our business.

Most importantly, we’re fully engaged in activities to insure the performance level of our Life Sciences System installed base. We’re making extra investment to be sure that our first products, recently installed at some extremely important customers, are supported at a level that will insure their success and ours.

Martin will give some additional color to these startup cost in his remarks.

In this new and rapidly growing market, we are competing for business all over the world, with the broadest portfolio of automated compound and biologic storage systems in the market. With 170 systems in our installed base, we’re the global market leader in the automated sample management space.

To date, a vast majority of the installed systems are used for chemical compound storage and that will continue to be a steady market in the coming years. However, the segment that’s growing most rapidly, is for the storage of biological samples. And the demands from the market for systems used for bio storage differ markedly from those used for compound storage.

With this in mind, we’ve already begun to integrate the combined R&D strength of our Brooks Automation, and Brooks Life Science Systems groups, to enhance the performance of our current bio-storage products. At the same time, we’re developing a roadmap for future offerings across the board, to better serve this rapidly evolving high growth market.

The sales cycle for these sample management systems are longer than for our products, typically 9 to 18 months, but our opportunity pipeline is robust, and we’re actively participating in all major opportunities.

I’d now like to give a little bit more color on our outlook for the December quarter. Our business slowdown [inaudible] began in the September quarter, and we’ve been able to manage the change in an orderly fashion. However, one business segment that was for a while any way, out of cycle with these markets, was the active display market for tablet computers where there’s been an aggressive build out of fabrication equipment for the glass coatings that form the active display. These coatings are applied in large vacuum chambers that utilize our Cryo Chillers.

For most of the last two years, we’ve seen consecutive quarter-on-quarter growth from our Cryo Chiller business. However, this business will be down in the December quarter. We anticipate the decrease from this market will cause our revenue from this business to go from an all-time record of almost $14 million in the September quarter, to approximately half of that in the December quarter.

Nonetheless, we’re pleased with the market share we’ve gained in the advance display market, and we’re in the process of launching new products into this space, which are more energy efficient, have smaller footprint, and provide us with higher gross margin.

We’re in a good position for the rebound in this business, which we anticipate may start as early as the first half of calendar 2012. As I mentioned, we see this as a pause in CAPEX spending in this rapidly growing segment, and although the decrease in this business will have a significant impact on our financial performance in the December quarter, we expect improvements in other areas of our business to offset some of this decrease.

Before I pass the call over to Martin, I want to reiterate that compared to a year ago, we’re a different company on a different trajectory. We have exited a low margin contract manufacturing business, entered height, growth, Life Sciences field where we’re advantaged and we’re gaining market share in this space. We have significantly increased the gross margin profile of the company, and we’re generating strong cash flow and using it to make the investments in new product development and acquisitions that will enhance our market positions.

We are poised to continue to grow market share in 2012, and we believe that it’s important to continue to invest in RD&E for new product development and to make improvements to our internal operations and supply chain capability.

We will however, manage our cost carefully in this uncertain business climate to make sure that we closely couple our investments through the [inaudible] that we generate.

I’ll now turn the call back to Martin.

Martin Headley

Thank you, very much Steve. With our on-going transformation of the company, there are a lot of moving pieces reflected in the financials. Our results also incorporate a significant industry slowdown for semi-conductor, LED, and Data Storage Manufacturing equipment.

Adverse performance against our assumptions after the margins of certain new products recently introduced by the Life Sciences Systems business, the pace of restructuring changes, reflecting themselves in the income statement, and the precipitous decline in MOCVD tool sales, after the recent LED capacity build, all had the major impact on our performance in the quarter. And as a result, we missed the bottom end of our guidance ranges for both revenues and adjusted EPS.

The actual results for the quarter were adjusted diluted EPS of $0.19 on revenues of 131 million. Slide three shows some of the significant events recognized in the September quarter financials. Nexus Biosystems was acquired effective July 25, and thus the quarter reflects two months of trading activity and cost, associated with a significant integrational restructuring we commenced to merger this business together with our prior acquisition, RTS. And the Brooks Engineering, financial and management resources to all drive new product development and operational effectiveness.

The slowdown in the semi-conductor markets was at the low end of our projections for the quarter. Our semi-conductor product revenues declined by 27% from June quarter levels. The shortfall in LED shipments at the end of the quarter was considerable, reflecting the market conditions noted by our ROEM customers, and there are revisions to their own forecast for LED shipments.

WE continued enhancing our product development capabilities through fiscal 2011, and with the full quarter of Nexus spend in December, we’ll have reached an investment level with which we have comfort. We also initiated a substantial supply chain initiative, and are at the early stages where we are making the investments through consultants and supply chain management, will only yield meaningful savings to cost of goods sold, later in fiscal ’12.

Away from operations, we’ve favorably resolved a long [inaudible] spending for our income tax uncertainty, and recognized a $2.8 million benefit in the quarter.

Turning to slide four, I want to describe our sequential revenues and operating profits before special charges developed from only June quarter, our third fiscal quarter to the September quarter, our fourth fiscal quarter.

In the June quarter, we recognized $42.3 million of revenues and $2 million of operating profits from the Contract Manufacturing business that we divested towards the end of that quarter. The September quarter, we recognized 6.3 million of incremental revenues and incremental losses of $1.5 million from our Life Sciences Systems business. This was significantly impacted by acquisition accounting, and I’ll address this with more granularity later in my prepared remarks.

The Brooks Global Service business continues its recent trends of solid top line and bottom line growth with a $1.4 million or 6.1% sequential increase in revenues and returning half of that revenue increase as incremental profits.

The core Brooks Products businesses were down 20.5 million or 17.3%, with the semi-conductor declines offset by growth in mix [inaudible] Cryochillers, largely to Smartphone and table manufacturing capacity expansion.

We limited the drop through on the revenue declines to $7.6 million or 37%. The ramp in the Brooks products solutions engineering expense, was $800,000 over the third quarter and consulting cost and other initiatives resulted in an increase in SG&A expenses of $1.7 million.

Our on-going business transformation has had significant impacts on our income statement ratios as demonstrated by slide number five. Gross profits before special charges grew as a percent of sales from 30.8% to 37.1%. Largely by subtraction from the divestiture of contract manufacturing business.

Our heritage businesses, Brooks Product Solutions and Brooks Global Services, performed at a roughly flat margin rate, despite the volume roll off. Brooks Life Sciences Systems depressed gross margins on a GAAP basis as a result of acquisition and counting, and integration adjustments, while the underlying margins were ahead of our heritages businesses.

Research and development expenses increased to 8.8% of sales with the dollar increases pretty evenly split between the additional expense from the Nexus business, and increases in the BPS spend I just referred to.

Selling, General and Administrative spending, reflect both divisional G&A cost for Brooks Life Sciences Systems, increase amortization for the Nexus acquisition, and higher consulting cost. Operating income before special charges at $9.7 million represented a 7.4% operating margin in a difficult quarter.

There’s a significant impact of non-recurring items on the sequential earnings comparators, and these are summarized within slide number six. The $42.6 million after tax gain on sale of the contract manufacturing business was unique to the third quarter, while the tax benefit from resulting past foreign tax uncertainties, was offset in the fourth quarter by acquisition accounting, a merger and integration expenses related to Brooks Life Science Systems. Although these had a net zero impact on the quarter, they clearly had significant impact to individual line items.

Other income and net interest income was slightly unfavorable without the litigation benefit reflected in the third quarter. As planned, we had an underlying tax benefit in the fourth quarter. Overall, net income attributable to Brooks on both GAAP and adjusted basis, was 12.1 million or $0.19.

The difficult market environment and the complexity of transitions with both acquisitions and divestitures rounded out a very successful year that you see summarized on slide number seven. We grew revenue by 16% to $688.1 million. The heritage products and services businesses grew by 24% to $540 million. We grew adjusted gross margins from 28% to 32.7%. This was slightly assisted by a transformative acquisitions and divestiture, but we also expanded our heritage product and services margins from 34% to 37.7%.

Operating profits before special charges, increased by 68% to $83.2 million and once again, non-recurring gains more than funded special charges. Our joint ventures performed well, providing $2.6 million of the increases in income below the operations life, both through their share of profits and management fees.

Our income tax provision excluding one-time benefits arising in both years, was modest and should remain so for fiscal 2012. Overall, GAAP net income more than doubled and adjusted diluted EPS increase from $0.78 to $1.32.

Fiscal 2011 was also a record year for EBITDA and cash flows. Our full-year adjusted EBITDA was $111.2 million with $17.7 million earned in the fourth quarter. And cash from operations for the fiscal year was $87.6 million, although we were short of our aspiration for the fourth quarter.

The most significant impact is shown on slide number eight, was the increase in inventories. Excluding acquired inventories of $7.9 million. This is reflective of late September push outs and systems that were not picked up on a timely basis by a number of our customers, as well as raw material receipts that could not be rescheduled as the demand declined late in the quarter.

Focus in the December quarter will be on rectifying these various situations. Fortunately, applications for the daily grind of collecting receivables on time, provide $10.4 million of cash flow.

Capital expenditures of $2.3 million should be typical for upcoming quarters. The quarter also saw the initiation of our dividend payment. This continues with the announcement of a $0.08 dividend for the fourth quarter, payable on December 20, 2011 for shareholders of record on December 9, 2011.

Cash and marketable securities reduced by $77.6 million over the quarter with nearly 87 million in outflows related to M&A activity. We closed the full fiscal year with $205.8 million of cash and marketable securities. This excludes restricted cash, and this amount is all considered relatively liquid.

The transformation of the business already producing results in diversification and dilution of customer exposures is illustrated by the chart and table on slide number nine. We had no greater than 10% customers in the quarter, and the three largest semi front end OEMs represented 19% of our business in the fourth quarter. That’s compared to 47% in the fourth quarter of fiscal 2010.

For this purpose, we attribute the end OEM as our customer since they make the designing decision, [inaudible] many into mediary contract manufacturing, they may utilize whose technically, who we invoice for the sale of component products.

Diversification of end market revenues is progressed to the point that semi front end products were less 50% of revenues in the fourth quarter, and the Brooks Global Services revenues, which are more stable and largely directed to the end user fabs and foundries were 17% of total revenues.

Industrial revenues were robust at 18% of total revenues, with the record quarter of mixed gas Cryochillers, another market included LED, MEMS, and solar, which represented in total, 11% of revenues.

A partial quarter of Nexus drove Life Sciences to just over 7% of total revenues. Life Sciences should be more than 10% of our October revenues in the December quarter.

Turning to our segment operating performance, our first attempt to extract the underlying performance of Brooks Life Sciences Systems without fair value accounting and other integration adjustments, required to present our GAAP financial statements as a result of the acquisition activity.

I’ll speak to the reconciliation presented on slide ten. On a GAAP basis, Brooks Life Sciences Systems recognized $1.6 million of gross profit, and 8.5 million of reported revenue. And after $5 million of operating expenses, the GAAP consolidated income statement reflected segment operating losses of $3.4 million. However, given the nature and status of the contracts we acquired, inventory charges recalled it, we made various purchase accounting adjustment.

Excluding those adjustments, the underlying performance on a good forward basis, was a somewhat healthy gross profit of $3.5 million on $9 million of revenues, resulting in a segment operating loss of $1.5 million.

The quarter suffered from lower underlying margins before acquisition adjustments than we projected. These margins at 39% were way down by high support cost around some new product releases, and some low margin sales inherited by Brooks.

Although we’ve reduced headcounts in the business by nearly 10% since making the acquisitions, little benefit flowed into the quarter, giving the timing and the counting for certain European work practices.

On slide number 11, we’ll review the sequential results of our Brooks Product Solutions business with sale of pumps and robots into the semi-conductor and data storage markets were in decline with semi fronts and revenues down 27% sequentially from the June quarter. Margins were sequentially flat with favorable mix and reduced warranty cost offsetting the overhead absorption challenges of lower volumes.

The increase engineering spend and consulting in this part of operations improvement initiatives, are the primary drivers behind the operating expenses increases in the quarter. Overall, the segment produced $8 million of segment operating profit, that’s a 8.2% margin rate.

The Brooks Global Services segment produced strong sequential results again as shown on slide number 12. Showing strong pump repair growth in recent quarters, the robot repair business produced double-digit revenue growth, that was partially offset by declines in end user spares.

This lack of decline is a trend we anticipate continuing into the December quarter. Favorable margins from the use of reserved inventories, drove gross margins to a high level at 36.2%, with approximately flat operating expenses, the business reported $4.2 million in segment operating income, the operating margin rate climbing to 17.6%.

Looking forward, we entered the December quarter after a weak bookings quarter. Our bookings were $110.3 million. However, we’re also [inaudible] slightly by revenues early in the quarter from late quarter push outs, and product pickups that failed to occur at the end of September.

We’re all painfully aware of the macroeconomic volatility. And this is translating into very poor visibility to customer commitments and frequent request for a quick response once customers have made commitments. This is all baked into our guidance, which is shown on slide number 13.

The December quarter will be even tougher than the September quarter, given the macroeconomic uncertainties that were a drag on capital spending decisions. We anticipate a further 7 to 12% decline in our total revenues with the growth in Life Science Systems being offset by reductions and sales of mixed gas cryochillers arising from a pause in the very aggressive capacity build for tablet computers.

We also see another double-digit decline in demand for semi-conductor front end equipment. This is a result of the above, we project December quarter revenues, that’s 115 to $122 million. With an adverse mix profile in both Life Sciences Systems and our Brooks Products Solutions, and some raw materials price inflation, we now project to adjusted diluted earnings per-share of between $0.05 and breakeven.

With that, I’ll now turn over the call to questions. Thank you operator.

Question-and-Answer Session

(Operator Instructions). And your first question comes from the line of Edwin Mok. Please proceed.

Edwin Mok – Needham & Co. LLC

So my first question is on the Life Science business. You know, obviously, you guys are just [inaudible] the business and it’s not profitable at this juncture and you had talked about, you know, this coming quarter, it’s going to be more than 10% - [inaudible] of Nexus. I was just wondering, how do you kind of think about profitability of that business, and when do you think, or at least, what revenue level do you think you need to achieve to hit the high-40s or the 50% gross margins that you guys talked about?

Martin Headley

I don’t think achieving those margin levels is solely an absorption issue. It’s also operations improvements and completing the integration. So we were anticipating lower margin levels, they’re slightly below our initial expectations where we thought they’d be in the low 40s, being 38, 39%. I think we’re a couple of quarters away from that. I think we’ve perhaps found the challenge is slightly more, but not markedly more than we anticipated and it’s just delaying that. But nothing that we believe that’s insurmountable and certainly, nothing that takes us away from believing that we’re able to harvest the potential we saw in these businesses when we made these acquisitions.

Edwin Mok – Needham & Co. LLC

I see. And I think – I remember last quarter you guys talked a little bit about seasonally September is a slower quarter, right. And if I just use 10% of your midpoint of the guidance, right, which is roughly around $12 million, is that how we should think about kind of a normal run rate of this business? And obviously, you know, you guys are still growing and going up in your business, but just kind of going into how I can get a sense of that’s the level that we think we’re thinking about accomplishing?

Martin Headley

I think you might anticipate a little higher revenue than that for the December quarter. We’ve made reference to it being seasonally a little higher. So – but we are – we definitely view this business as being above the trailing revenue rate, which was $48 million. We’re seeing the bookings come in and the growth start to realize directly. We talked about this having a growth potential of 18 to 20% and we wouldn’t back off that kind of compound annual growth rate for this business. We believe the top line will grow nicely.

Edwin Mok – Needham & Co. LLC

Great. That’s very helpful there. And then just moving on to your other products, you mentioned that on the semicap side of the business, you see – you expect double-digit decline right? And we’ve heard from some of the OEM customers talk about orders picking up in the December quarter. How is that kind of reconcile with that and is it inventory adjustment on your customer side or you expect business to trough in the December quarter? If you could help me with that.

Martin Headley

The current way we view a very uncertain world is that we anticipate the business to trough. If we interpret what our customers are saying correctly. We clearly, like everybody else, feel uncomfortable with the macroeconomic conditions and I think everybody is going to have to be very nimble in these situations. But at the moment, I’ll bet you would be – that the December is probably a trough quarter.

Edwin Mok – Needham & Co. LLC

Great. I have one last question and then I’ll go away. Just in terms of operating expense, how do you kind of think about it? You know, [inaudible] in some of these new product that you guys are developing, especially in the Life Science area? Do you anticipate [inaudible] about this – by excluding restructuring charge in the coming year? And you know, how much more do we expect OpEx to increase?

Martin Headley

I would say, if you look at our engineering spend, from a small impact from the full quarter impact of [inaudible] the Nexus acquisition, you probably see engineering running at roughly the order of magnitude that we previously expected. I think you’re going to see a couple of quarters of slightly higher SG&A as we pursue some of these other initiatives. But equally, we’re working on the relationships to build – drive that down. Over time, it gets driven down a bit as we start to recognize the cost savings from the actions we’ve taken at Brooks Life Science Systems. So I would say overall, you’re seeing something that’s closer to the peak and we will obviously adjust it to the market conditions we see as well. So other actions will be taken if necessary.

Edwin Mok – Needham & Co. LLC

Actually, just to clarify that, you mentioned that you have taken some action recently, right? Is that something that we should expect to have a benefit in in some quarter or is more likely the March quarter it will be on?

Martin Headley

I think it’s more the March quarter before you start to see that.

Edwin Mok – Needham & Co. LLC

Great. Thanks for clarifying that. That’s why I asked. Thank you.

Martin Headley

Thank you.

Operator

And your next question comes from the line of (CJ Nuss). Please proceed.

(CJ Nuss)

Hi. It’s [inaudible]. Thanks for taking my questions. I just wanted to clarify some of the comments regarding the comments regarding the December quarter [inaudible]. It seems that EPS is partially down by higher income tax. Could we talk about what the tax expense here embedding in the guidance and how you think about that heading into 2012?

Martin Headley

Great. I’m embedding within our guidance, a continuing tax rate in – for the full fiscal year of 3 to 4%, with it being at the higher end of that range in the early quarters and we typically will have a small benefit recognized in the fourth quarter.

(CJ Nuss)

Got it. And then switching gears into the gross margin side, we talked about some of the inherent costs within Life Sciences and some of the mix issues dragging down the gross margins there below your expectations. You know, at the current run rate that you’re anticipating from a revenue standpoint, do you see fiscal ’12 gross margins even getting to mid-40s or should we assume low-40s as kind of the more achievable target for the coming year.

Martin Headley

I think for the full year as whole, you should expect mid-to-low or low-to-mid-40s if – that kind of range. So it’s more towards the low than the mid-40s.

(CJ Nuss)

Okay, got it. And then just the final questions, on the equipment side, how would you characterize the inventory levels at your customers of your – of Brooks Components? Have they worked through most of the inventory or you know, they just….

Martin Headley

There are relatively few system, although there are some. And our knowledge of the rate which those are expected to move during the December quarter is in fact factored into our guidance.

On the component side, we believe it to be a relatively little, almost non-existent on the robot side and relatively modest at this stage in the pump side given the rate of which pump revenues declined during the September quarter. And so we believe on the component side, we’ve seen the vast majority of any inventory correction that we’re going to see.

(CJ Nuss)

Thank you.

Operator

Thank you. And your next question comes from the line of David Duley. Please proceed.

David Duley – Steelhead Securities

Yeah, could you give us a little bit more detail on how you think the revenue is going to break out amongst the pieces you showed in the pie chart for the December quarter?

Martin Headley

You mean, by market?

David Duley – Steelhead Securities

Yes.

Martin Headley

I would say that clearly we talk about in prior conversations or prior question from Edwin, you’re looking at over $12 million of Life Sciences, over 10% of the business will be Life Sciences. I would say that we see the declines in the semiconductor business being more rapid than it is in the injection market, but you are also going to see the industrial piece shrink by virtue of the mixed gas cryochillers. And Steve gave the roadmap there, that that’s roughly 6 to $7 million of decline there. So that’s going to take that down by a few percentage points. When you take that into account, semiconductor comes down very slightly, Life Sciences up fairly significantly, other adjacent markets up slightly on industrial down. BGF having a consistent top line on a declining product reviews, they’re going to expand slightly as a percentage.

David Duley – Steelhead Securities

And the gross margins you talked about, low 40%, was that for the Life Science business or for Brooks total?

Martin Headley

No, that was for the Life Science business was what I thought I was addressing that.

David Duley – Steelhead Securities

Okay. And did you say that the service business was going to expand as a percentage of revenue?

Martin Headley

As a percentage of revenue, yes.

David Duley – Steelhead Securities

Okay. And when the semi business recovers, would you expect – how many 10% customers would you ultimately expect to have again when the semi business gets back to a normal run rate.

Martin Headley

In my definition, reviewing the customer as the end OEM that takes the complete tool and not any intermediate contra manufacturer, we do not anticipate any 10% customers.

David Duley – Steelhead Securities

Okay. That’s it for me. Thank you.

Martin Headley

Thank you.

Operator

And the next question comes from the line of Wenge Yang. Please proceed

Wenge Yang – Citigroup

Hi. Thank you for taking my question. I look at the operating expenses and try to figure out what the reason behind high operating expenses means in the quarter. And could you provide a little bit more and explain why it’s higher than your guidance and how it’s going to track in the next quarter.

Martin Headley

Okay, the Life Science expense, if you’ll look to the Brooks Life Science System, they’re at $5 million of operating expenses in the quarter that comes from Brooks Life Science Systems. We had consulting and other supply chain initiatives associated with the operations improvement. Those costs are reflected in our selling, general and administrative expenses. Those are between 1.5 and $2 million.

We had an added investment in our engineering for the Brooks Products Solutions as we really got close to completing our increase in expertise and capacity for product and supporting our new design in win opportunities, and that was $800,000. So those were the most significant pieces of the operating expense increase sequentially.

In terms of versus expectation, we spent a bit more on the supply chain initiation so we initiation you going into the quarter. And as I described, we got around Brooks Life Systems, we did not get the accounting benefit for a number of the actions that we’ve taken in terms of restructuring headcount.

Wenge Yang – Citigroup

Okay, so will it be – for fiscal Q1, for the Life Science supply increase, or actually the [inaudible] will become a little bit higher because we are taking the full speed months coming in the Nexus operation, right?

Martin Headley

Correct.

Wenge Yang – Citigroup

What about that consulting expense? Are they going to go away for the quarter?

Martin Headley

No, that will be at the similar level as part of this very essential program to improve our supply chain operation’s effectiveness.

Wenge Yang – Citigroup

Okay. This seems to be a bit higher than when you’ve had it in the last quarter. Is this because you totally integrated Nexus and find out the expense of that operation is higher than you expected?

Martin Headley

I think there’s that and we’ve also decided that the [inaudible] test on our operational initiatives needed to move forward rapidly once we’d embarked on this activity. This isn’t something that can be done slowly overtime and therefore, we’ve given it substantial investment.

Wenge Yang – Citigroup

And you mentioned you would see some fat off your current cost-cutting efforts starting in March quarter, correct?

Martin Headley

From the point of view of the Brooks Life Science Systems, you also should probably see a slight roll off in some of the other costs there. And we’re also looking as we move through this quarter, obviously in a difficult time, but further actions we might take. So we’ll be addressing this as we move forward in the fiscal year.

Wenge Yang – Citigroup

Okay, understand. The second question regarding your comment on that December quarter is going to be the trough, is this just based on the comments from your suppliers or you actually see some size of your own orders that are going to pick up beyond December quarter?

Martin Headley

This is not the basis of bookings we have in house. This is on the base of what we have been notified by critical customers of their purchasing plans and manufacturing plans for the quarter. So clearly, all bets are off until the bookings are actually received. And frankly, until the product’s delivered. But the indications from our customers, some of the public pronouncements as well as seeing, for instance, solid indications of a no-new CapEx plan in Korea, all give us rise to think that at least the correct statements to say that this is the trough but it is equally possible that it isn’t. But those are the indications we have at this moment.

Wenge Yang – Citigroup

And just a last question. You made a comment that LED is dropping pretty fast. And how much revenue is coming out of LED and where do you see this in the next two quarters?

Martin Headley

I think it’s not the LED revenue for us is dropping fast, it’s the fact that this was going to be a substantial growth engine for us. In fact, one of the concerns we previously had about the market adoption of multiple reactor tools has largely been overcome with a favorable response to those tools. It’s just that there aren’t that many reactor counts being shipped currently.

So it means that our growth opportunity is not transpiring as we originally believe it would rather than we see declining LED revenues.

Wenge Yang – Citigroup

Okay, any indications that this trend will continue?

Martin Headley

I would have to say if we think visibility is short in semiconductor, what we’re experiencing LEDs, it’s even shorter.

Wenge Yang – Citigroup

Okay, thank you.

Operator

And your next question comes from the line of Satya Kumar. Please proceed.

Satya Kumar – Credit Suisse

Hello? Yeah, hi. Thanks for taking my question.

Martin Headley

Hi, Satya.

Satya Kumar – Credit Suisse

Hi. What type of product gross margins are we looking at in the December quarter?

Martin Headley

I don’t think we’re providing guidance at granularity on that at the moment. It is depending up on the final mix, that’s one of the uncertainities that’s embodies within out range. Our range is the mixture of – the mix of product as well as the absolute level of the top line. But you would anticipate with decline that – in the top line, that it’s going to be done somewhat. I don’t think we’re in the position to provide guidance around that at the moment, Satya.

Satya Kumar – Credit Suisse

Okay. I mean, I guess that I assumed that the Life Sciences were slightly higher gross margins than services were sort of flattish would be a reasonable sort of…

Martin Headley

I think that’s a reasonable assumption, yes.

Satya Kumar – Credit Suisse

Okay. I was intrigued by a comment on this granular market going down in the December quarter. I was wondering you could give us some perspective as to how big that market was for you, perhaps this calendar year. And you mentioned it was growing from last year, so I’m wondering if you could also give that?

Martin Headley

Well, I think as Steve made mention up in his prepared remarks, this had grown this business line for mixed gradual, it had grown to $14 million is a bit high. And the majority of those revenues were for these applications.

Stephen Schwartz

Yes. Satya, just to give you some color on that – in the first quarter of the fiscal year, we had around $8 million of revenue. And it grew to approximately 10, approximately 12, approximately 14. So steady growth just through the fiscal year.

Satya Kumar – Credit Suisse

Okay, and it was growing sort of last year as well from a pretty low level?

Stephen Schwartz

Yeah. It grew for the – a couple of – about 3/4s before that as well, yes.

Satya Kumar – Credit Suisse

Right. Do you think that the weakness that you’re seeing in this particular market segment is because of the overall slowdown in these aid of capacity conditions for that, or are there some technology shifts happening from perhaps, or displaced or maybe has a different mix?

Stephen Schwartz

It would be. I think, Satya, however, I think what we’re seeing is several quarters of enormous numbers of tools going in, and business hasn’t dropped to zero. We’re going to go to something just about half of the current level and we’re at the ready to begin shipping tools again. There’s been a lot of capacity put into place and I think – what we see is just a pause right now in what we think is growing. We also are quite aware that the tools that are used for these applications are being redesigned and I think it’s one of those things where, so similar to the discount in LED, likely there’s a different type of higher capacity tool on the way that we’ll be asked to serve.

Satya Kumar – Credit Suisse

Okay. And switching gears to semis, how much do you think 450 millimeter could represent in 2012 for you given that you’re engaged with five or more customers at this point. Getting to double-digit type levels, percentage of revenues in 2012…

Stephen Schwartz

It would be a few million dollars probably for the whole year.

Satya Kumar – Credit Suisse

Okay. And lastly on the product business, if I sort of think that you’re Life Science bookings were double digits in the September quarter or there abouts, and assuming that customer operations is one to one, book to bill is obviously very low in the [inaudible] business. And if I look at the commentary from your OEM customers that books are up 20 to 35% on average, it gets to be a high percentage. But in terms of the actual levels of billings, it’s not necessarily a much higher level. Looking at the type of activity that you’re seeing right now in the December quarter for the new orders and perhaps a pipeline into next year, are you also thinking about the shipment pipeline that is developing relate to the levels that you were seeing earlier in this year?

Martin Headley

Well, I think that you’ll recollect the third quarter had actually a very strong book to bill for our core business. So I think part of it was that we had strong bookings ahead in the third quarter that were being going through the pipeline in the fourth quarter. So that’s one reason why even though that book to bill was very low, it doesn’t necessarily have implications into the – into the first quarter.

In terms of our profile for our fiscal 2012, it’s clearly a view that this is going to be a backend loaded year, backend loaded, both in terms of operational improvement on margins and backend loaded on revenues for our BPS segment as well as for our Brooks Life Science Systems segment. So the profile will be for a slower start to the fiscal year but we still think that the fiscal year has a very significant opportunity to it.

Satya Kumar – Credit Suisse

Okay. Thank you.

Operator

And your next question comes from the line of Patrick Ho. Please proceed.

Patrick Ho – Stifel Nicolaus

Thank you very much. I know it’s early in the integration process in your Life Sciences business, but in terms of both Nexus and RTS, can you give us any little bit of color in terms of the leverage you may be able to get in terms of I guess the product portfolio and how much of the integration process may be necessary between those two entities within now the entire division?

Stephen Schwartz

Yeah, so Patrick, there is some product overlap. But – some product portfolio overlap, so some pretty big sized stores and the certain temperature range. What we found is that in one of the organizations we had, for example, very strong software capability we have to leverage across the entire portfolio. In another, we have a really superb design capability. And how we spend the next two quarter pulling these two groups together so we have basically a single engineering organization even though two, now three locations and it would include Chelmsford. There’s a lot to be gained here. But we’re finding that there’s expertise that we can leverage, if you will, from different parts of the organization. More adjustment has to be made. And what we’ll do with some of the resources when we combine the three entities is work on the next-generation products as well because we have some unique skills and we put some technologies from the Brooks Chelmsford team in with the industry expertise, we think that will give a very powerful next-generation product development engine for us.

Patrick Ho – Stifel Nicolaus

Okay, that’s very helpful. The second question in the Life Sciences business, and maybe Martin, I know you gave a little bit of color in terms of where the expenses are going, maybe if you could go one stop below. In terms of that division, how much of it would you characterize as kind of the infrastructure build out, you know, trying to integrate versus say the customer penetration cost because I’m assuming that you just mentioned that you had some new product introductions. How much of the cost and expenses are I guess going into those two different buckets maybe on a percentage basis?

Martin Headley

I don’t know the exact order at this time to give you an accurate representation of it only to give you kind of an overall sense of the picture, which is the – with some new products here, new products that both RTS and Nexus were introducing literally at the time of our acquisition, there are in those situations, always are a lot of field support costs associated with addressing those new product issues. Those are largely reflected in a reduction in gross margins rather than in the operating expenses. Clearly, the other thing that we have is that in those introductions, particularly when they are, for instance, in some of the areas of instruments around the full-blown stores, we have to have the right capabilities to sell that equipment and those are being developed as well.

So the majority of those costs around the new product introductions are probably in costs than they are in the selling mix expense although there are some in selling expenses.

Patrick Ho – Stifel Nicolaus

Okay, great. And I guess just in terms of infrastructure build out, I guess, you know, at a very high level, how many quarters do you see in terms of I guess not only just the integration costs, but I'm assuming you have to build out, you know, teams, you have to build out and hire new people. How many quarters do you think that will…

Stephen Schwartz

No, Patrick, I think we have adequate personnel right now for the businesses. So it’s reconciliation of who does what job because we do have some duplication and I think it’s taking the best talents and putting them in the right spots right now.

Patrick Ho – Stifel Nicolaus

Okay, great. Thanks a lot.

Operator

And your next question comes from the line of Ben Pang. Please proceed.

Ben Pang – Caris & Co.

Thanks for taking my question. On the Life Sciences business, what’s the customer concentration like just in that area in terms of the number of customers as well as the geographic region?

Stephen Schwartz

Hi, Ben. We have 170 systems installed in just under 100 customers. Just to give you an idea. When we do an assessment to how many bio storage potential customers there are, whether they do it by a manual freezer, a nitro doer, we measure that in thousands of potential. But we have just under 100 customers in our install base.

And most of the business is Europe and North America. A little bit of penetration in Japan just beginning, but a majority of the market opportunity exists in North America and in Europe.

Ben Pang – Caris & Co.

Okay. So when you were talking earlier about, I guess, the cycle for market share gains in this area, you kind of gave a timeframe of like a year to a year and half. Is that right?

Stephen Schwartz

That’s about right.

Ben Pang – Caris & Co.

Okay, and how do you go about approaching that because your customer base is so large? I mean, how do we think about the market share, you know, it’s such a different type of customer concentration as your other businesses?

Stephen Schwartz

This is going to sound a little bit familiar to you. When tools kind of get to be about $1 million and the sales cycle is about that long and you’ve got a global sales force, you know what that sales cycle looks like. So we have people that go with response to quotation who understand the technical details, we send product managers to help them understand the opportunity and there’s a lot of back and forth that take place. But we have a pretty significant global sales organization made up now of both Nexus and RTS personnel. And Nexus, actually a year before we acquired them, had acquired a company called RIM, who was the leader the very large storage area. So we have a very experienced, very capable account team backed up by skilled application and product people who really know how to address the technical issues that the customer has.

Ben Pang – Caris & Co.

Great. And then this is a follow up for Martin. When you answered the question regarding the LED opportunity, I actually didn’t quite understand the answer that you gave in terms of why you’re seeing the slowdown right now, but why you think the underlying growth rate is much stronger. Can you repeat the answer again, please?

Martin Headley

Well, the answer is, or maybe I was not addressing the question exactly head on. I think the questions I interpreted was what’s the impact on – for decline in our LED revenues. My response was gravitating towards our issue has not been LED revenues are declined, it’s that they’ve not grown the way that we have – were projecting. And that in fact, for the LED reactor shipments that are being made, more of those are on multiple cluster arrangements than we had previously projected. So from that point of view, it was favorable but that the overall market conditions around the number of reactors going into the market was not favorable.

Ben Pang – Caris & Co.

Okay, so you are still seeing I guess a favorable condition in terms of the cluster tool, essentially, right?

Martin Headley

Yes, and I think you’ll have heard positive statements elsewhere around that.

Ben Pang – Caris & Co.

Okay, and my last question is regarding the service, the 17% pie. Is that like primarily weighted towards the semi front end or is that pie similarly spit up with the industrial et cetera?

Martin Headley

No, it is mostly, not exclusively, but about order of magnitude, you know, around 90% of it being semiconductor. The difference there is those sales are predominately to the fabs and foundries running to the OEMs. So it’s a different customer base and it has a different profile to it by virtue of being repair service and spare parts. The spare parts are perhaps the most cyclical piece around the repair piece.

Ben Pang – Caris & Co.

Thank you very much.

Martin Headley

Thanks.

Operator

(Operator Instructions). And your next question comes from the line of Edwin Mok. Please proceed.

Edwin Mok – Needham & Co. LLC

Hi. Thanks for taking a follow up. Just a quick question. In the last quarter, you guys talked about potentially a consumable business within your Life Science Group. Now that you have integrated Nexus, how do you kind of view that? Do you see that as a growth driver potentially?

Stephen Schwartz

We do, Edwin. So the consumable business right now, between the consumables and service, probably about, gosh, we anticipate even next quarter, probably somewhere around the 20% of the business.

Edwin Mok – Needham & Co. LLC

So you are already generating around 20% of your sales coming from that side?

Stephen Schwartz

Yeah, there are times when it’s higher, but right, the consumable business is a pretty steady part of the Life Sciences business.

Martin Headley

Interesting, one of the areas we’re just going through is developing the project management to really exploit the consumables opportunity. And that team’s been put together within Brooks Life Science Systems. So it’s now for them to grow that business.

Edwin Mok – Needham & Co. LLC

Okay, that’s helpful. And then on the cryogenic commentary, you guys talked about, you know, I guess moving the industry group. Can I ask you just to clarify, di that business actually grew on the September quarter versus the June quarter and if it did, how much did it grow? And yo mentioned about a pause, right, is it – the level of decline is that back to where you saw that business a year ago, last quarter? How do we kind of think about that?

Martin Headley

Well, this actually…

Stephen Schwartz

The chillers? About six quarters ago.

Edwin Mok – Needham & Co. LLC

I see. But did the seat of the business grew essentially in the September quarter?

Stephen Schwartz

Yes, they grew very nicely. They did again, yes.

Edwin Mok – Needham & Co. LLC

I see. Great. I just wanted to clarify that. Thanks.

Operator

And at this time, there are no further questions in queue.

Stephen Schwartz

Well, thank you, everyone. We appreciate your interest and participation today, and we look forward to speaking with you on next quarter’s call.

Operator

And ladies and gentlemen, this concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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