Brooks Automation's (BRKS) CEO Steve Schwartz on Q3 2016 Results - Earnings Call Transcript

| About: Brooks Automation, (BRKS)

Brooks Automation, Inc. (NASDAQ:BRKS)

Q3 2016 Results Earnings Conference Call

July 28, 2016 05:30 PM ET

Executives

Lindon Robertson - EVP and CFO

Steve Schwartz - CEO

Analysts

Edwin Mok - Needham and Company

Paul Knight - Janney Montgomery Scott

Patrick Ho - Stifel Nicolaus

Craig Ellis - B. Riley

Farhan Ahmad - Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Q3 and Fiscal Year 2016 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, July 28, 2016.

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

Lindon Robertson

Thank you, Mike. And good afternoon, everyone. We would like to welcome each of you to the third quarter financial results conference call for Brooks’ fiscal year 2016. We will be covering the results of our third quarter ended on June 30, and then we will provide an outlook for the fourth fiscal quarter ending September 30th of this year. A press release was issued after close of the markets today and is available at our Investor Relations page of our website, www.brooks.com, as are the illustrated PowerPoint slides that will be used during the prepared comments during the call.

I would like to remind everyone 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 on the aforementioned PowerPoint presentation on our website and our various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements, should future financial data or events occur that differ from the 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 in addition to and in conjunction with results presented in accordance with GAAP. We believe these non-GAAP measures provide an additional way of viewing aspects of our operations and performance. But when considered with GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Brooks’ business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves.

On the call with me today is our Chief Executive Officer Steve Schwartz. He will open with his remarks on the business and our third quarter highlights and will provide an overview of the third quarter financial results and a summary of our financial outlook for the quarter ending September 30th, which as I reminder is our fourth quarter of the fiscal year 2016. We will then take your question. During our prepared remarks, as I mentioned, we’ll be referring the to the slides, available to everyone on the Investor Relations page of our Brooks website.

With that, I would like to turn the call over now to our CEO, Mr. Steve Schwartz.

Steve Schwartz

Thank you, Lindon. Good afternoon, everyone, and thank you for joining our call. We are pleased to have the opportunity to report the results of the third quarter of our fiscal year 2016.

Q3 was an excellent quarter for the Company, both in terms of financial performance and in the achievement of key operational objectives. We proved the capability of our new organization structure to deliver growth in revenue and profit. We reaffirmed the strength of our product offerings, which serve semiconductor and life sciences markets, as we continue to capture market share. We extended our streak of expansion in the high growth semiconductor areas of deposition and etch, contamination control, and advanced packaging. And propelled by another quarter of 10% sequential revenue growth, we delivered on our key life sciences objectives.

Specifically June revenue increased to $148 million, up 9% from March with strong growth from both semiconductor and life sciences businesses, and most importantly quarter to quarter, earnings per share doubled on a non-GAAP basis, fueled by more than 200 basis points of gross margin increase. Because of our strong market position and as a result of the significant restructuring actions we took one quarter ago, we’re progressing on our growth and margin targets, as we head towards fiscal 2017.

I would like to give some color on the progress in our key initiatives in both the semiconductor and life sciences business and share my thoughts as to how we see business in the coming quarters. I’ll begin with semiconductor.

All in our Brooks Semiconductor Solutions Group segment revenue increased 9% in the quarter. Our semiconductor segment is the combination of what we formally referred to as Brooks Product Solutions and Brooks Global Services.

Inside of BSSG, we’re benefiting from the positive upswing that’s coming from 3D NAND capacity increases, and the initial build out of 10-nanometer foundry expansion. Although revenue from services and industrial segments were essentially flat with Q2, revenue from our front-end semi products was up 15% and revenue from back-end advanced packaging jumped 23% in the quarter.

As we detailed in our Investor and Analyst Day on June 1st, we’re very focused on three rapid growth sectors in semiconductor: The combination of deposition and etch, contamination control and advanced packaging. This is our fuel and what drives our expectations that our semiconductor revenue will outpace the growth in wafer fab equipment spending over the next few years. That said, each of these sub segments contributed differently in the quarter.

Different from past quarters, when we demonstrated rapid semiconductor growth, our acceleration in Q3 was not led by vacuum automation products, as deposition and etch tools were relatively flat in the quarter. We do anticipate resuming vacuum automation growth in the September quarter as short cycle orders coming out of Korea have called many of us to fast action, to meet some unanticipated pull-ins for the calendar year.

Short term perturbations aside, we remain extremely well-positioned to capture the outsized opportunity presented by vacuum processes over the coming years. The increasing number of complex process steps that they are need to advance the semiconductor industry, present even more demands on wafer handling in environments that contain new materials, new chemistries and new sources for contamination. We’ve already dedicated ourselves to resolve these difficult challenges as well as those of temperature and critical placement accuracy that are compounded at 7 and 5-nanometer technology nodes. Our ability to resolve these problems is why we are the largest vacuum automation supplier to more than 200 OEMs who sell deposition and etch equipment tools to the industry. It is noteworthy that all device types whether logic or memory require the capability we’ve designed into our products, so we’re positioned well for any type of fab expansion.

In our contamination control solutions business, revenue jumped from approximately $6 million in Q2 to $16 million in Q3. We are particularly pleased not only with the volume but also with the breadth of our expanding customer base as in the quarter we shipped products to five different foundry customers and we took orders from two new memory makers. This brings our customer count for our advanced CCS product lines to 10 with 4 memory customers.

Additionally, we further solidified our leading market position as we shipped five FOUP cleaners for 10-nanometer production and we have 10 more tools currently in backlog that are scheduled to ship before the end of the calendar year. Our current forecast is for CCS to increase revenue again in Q4, bringing our year-over-year growth to more than 15% in this important new segments. Further, we observed that the number of FOUP cleaning steps increases by 20% to 40% with each smaller technology node. And because of our keen focus on next generation chemistries, we’re confident that we can continue to grow in this market.

Our backend advanced packaging business was very strong as we shipped products to 14 customers and achieved another record quarter at $11 million. Already, we find ourselves at the end of our third quarter with almost as much advanced packaging revenue as in all of fiscal 2015. The business was fuelled by some additional shipments for tools that were installed at TSMC’s Info line, and although we do not anticipate additional expansion at that customer until Phase 2 begins in 2017, there is still demand building for other advanced packaging fan out [ph] opportunities that should allow us to increase revenue again in our Q4. All-in, business from these drivers, deposition and etch, contamination control, and advanced packaging grew more than 20% quarter to quarter and 10% year-over-year.

Furthermore, we fully expect these trends to continue and are forecasting growth from these same segments again in Q4. Because of our market-leading position in these three areas, we have a high degree of confidence that our semiconductor business can outgrow wafer fab equipment spending by 2% to 4% per year on average over the next few years.

I want to take a moment to follow up on commentary we made during our Investor and Analyst Day on June 1st, when we described in some detail the transformation that we’ve effected in our semiconductor business. We explained it in the formation of our product portfolio, we have intentionally defocused on atmospheric robots and standalone components as they become highly commoditized. Consistent with this direction, we announced one year ago that we had mutually agreed to wind down our Yaskawa Brooks joint venture and with it our atmospheric robot distribution agreement in North America, thus bringing this 10-year relationship to an amicable conclusion. The last of our revenue from this arrangement occurred in the June quarter and going forward, we will no longer recognize any revenue from this endeavor.

Additionally, we previously announced that license revenue for some IP from our atmospheric products is on the brink of expiration. Over the past two years, the combination of atmospheric robots from the distribution agreement and our license revenue has averaged approximately $7 million per quarter. This revenue had all but ended [ph] as of the end of June with less than $1 million contribution forecasted for the September quarter and zero after that. From September onward, we will have a clean, stable portfolio and the progress that we will demonstrate from quarter-over-quarter will be fully attributable to continuing operations. This is exactly why we talk about being at an inflection point. When we reach the end of the September, our revenue will come from products match the segments where we will continue to invest and which can support our growth and profitability objectives.

In general, we share the same positive outlook for semiconductor fab expansion that you’ve been hearing about lately. 3D NAND memory capacity additions as well as 10-nanometer foundry capacity look to be very active in the second half of this calendar year. We’re beginning to see resurgence of demand from our Korean OEMs, who predominantly serve Korean IC makers. They’ve been relatively quiet for more than a year, but they are now being propelled by the boost in memory expansion from their customers in Korea. Additionally, we’re seeing more strong demand from Chinese OEMs as China continues their foundry capacity additions.

I’ll now give an update on our life sciences business. Revenue in the quarter was $29 million, up 10% sequentially and up 73% from the June quarter, one year ago. Most importantly, gross margin grew again and reached 40% in the quarter that’s up 150 basis points from Q2 and a full 1,000 basis points from a year ago. We increased operating income by $1.5 million, which rounds to the breakeven objective we have for this quarter.

But this is more than a single data point. It’s an inflection point. Let me remind you from where we’ve come. In fiscal 2015, we had operating loss of $17 million in life sciences. In the December quarter last year, we lost $4 million but we told you that we are on a path to cut that loss in half in March, which we did; and then, we would get to breakeven in June and we are there. Most importantly, we forecast growth again in the September quarter when we expect to deliver positive and sustainable operating profit. We have tremendous momentum in the business and we are reaping the benefits of the strong products and services offerings that are in the sweet spot of the growing demand of our customers who need our help to manage their precious sample collections. All systems are ago and we’re on track to deliver on the performance that we’ve guided for our future.

Nonetheless, I’d still like to give a few highlights from the business. Total bookings for the quarter were $41 million. BioStorage revenue increased by another $1 million and we added 12 new customers. We had $1.7 million in bookings from our family of ultra-cold cryo products including our new BioStore III Cryo systems and related transport and consumables products. And although, it’s twice what we booked in March, we are still about a quarter behind our internal plans. We’re seeing strong customer interest and our pipeline continues to build. However, conversion to revenues has started out slower than our initial estimates. Given our strong pipeline, we expect revenues from the BioStore III Cryo business will exceed $1 million in the September quarter and we will keep you informed about our progress as we grow this important new sweet of cryogenic automation products and accessories.

Also in the quarter we added another 20 new customers across diverse end markets, pharma, health sciences, government and academic, and we completed customer acceptance testing of two major sample storage in record time, highlighting the performance and efficiencies we’ve gained from our stores business, as a result of the transition and consolidation of large stores into our Manchester Center of Excellence. What’s more, we have a robust pipeline for all of the segments in our life sciences, and we do feel that our positive momentum and rapid growth will continue through Q4 as we head into fiscal 2017.

Our complete portfolio of offerings is proving to be much more within the combination of automation, consumables, services and informatics. We now have the ability to offer solutions to any set of issues the customers has, as it relates to ensuring that any sample, every sample can be delivered to any site at any time with 100% precision with the complete guarantee of quality and the precise record of history and sample origin.

As we make progress toward our growth and profitability goals, we forecast another quarter over quarter top line increase of 10% and that life sciences will become profitable in September. This rapid organic growth path that we’re on is a result of the investments we’ve been making in innovation and product development, as well as in our sales and go to market infrastructure. We’re proving that the life sciences cold chain opportunity presents tremendous profitable growth potential for the Company. All indications from our strong and growing opportunity pipeline support our forecast for more than 30% growth next year. All-in, we’re very positive about our outlook. The combination of growth in our core semiconductor business combined with another quarter of growth in life sciences should make up for the $6 million decrease in the revenue stream I mentioned earlier.

We’re positioned and structured to continue to improve profitability and you should expect steady progress in all fronts, as we conclude fiscal year 2016. We’ve already initiated further efficiency improvements for which we expect to see benefit from in 2017, and we’re confident in our ability to drive additional profitability in the business.

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

Lindon Robertson

Thank you, Steve. Please refer now to the PowerPoint slides available on the Brooks website under our investor relations tab. To start the remarks, I draw your attention on slide three, which is a consolidated view of our operating performance. Top-line revenue increased 9% sequentially to $147.5 million, driven by 10% increase in life sciences and a 9% increase in semiconductor solutions.

The GAAP net income was $8.6 million or $0.12 per share supported by top line growth, the improved gross margins, and reduced operating expense, driven by the recent restructuring. As a reminder, in the previous quarter, we also put a non-cash reserve against our U.S. deferred tax assets, which drives a significant change quarter to quarter on the tax provision line. Let’s discuss the non-GAAP picture on the right.

Non-GAAP gross margins increased 2.2 percentage points to 37.5%, reflecting higher margins in both, life sciences and semiconductor solutions. We also saw lower R&D spending and lower SG&A. In the prior quarter, we had 1.6 million benefit to operating expense from the reversal of accrued incentive base compensation for employee separated from the Company. We only have 200,000 of this effect in this third quarter, as we finished up our restructuring but we now have the ongoing savings from the reduction of the workforce. At the bottom line, we produced $11.1 million of non-GAAP net income or $0.16 per share, more than double the prior quarter.

As we look at our segment revenue outline on slide four, I highlight the change of reporting segments, as a result of our recent restructuring. Beginning this quarter, we’re reporting operating results in two segments, the Brooks Semiconductor Solutions Group, which includes all products and services that support the semiconductor in adjacent markets and the Life Science segment which remains unchanged from the past and which already included the products and services for the life sciences market. The new reporting better aligns with our new operating structure, how we manage our performance and how we allocate resources to do so.

So, this was a strong quarter, 9% sequential increase in revenue this quarter was driven by both segments. Over the past six months, the semiconductor business has steadily gained steam, the primary driver was growth in contamination control solutions with multiple customer placements and our automation offerings continued to benefit from the expanded opportunities of wafer level packaging and the increase in etch and dep process steps. [Ph]

In life sciences, we saw sequential double-digit growth from the legacy business and 9% from the recently acquired BioStorage business. This quarter, I have added a perspective on growth at the bottom of the page from the organic base versus acquisition. We’re happy to report the base systems business has turned to 5% organic growth on a year-over-year basis. As we noted at our recent Analyst Day, we do see ourselves at an inflection point in our total business well-supported across both semiconductor and the life sciences businesses.

Let’s go to slide five and get deeper into each. A 9% growth at the top line for Semiconductor Solutions Group set the stage for improved leverage of our business. This is more than simply volume growth. Contamination control solutions grew $16 million in revenue and provided margin expansion to our portfolio. We also gained operational efficiency and the savings from our restructuring, estimated to drive approximately 70 basis points of the margin improvement in this segment. In total, gross margin expanded 2.4 percentage points to 36.9. We have initiated our next phase of margin improvement actions already with a primary focus on streamlining our repair operations. We are incorporating the North America and the European pump repair operations into our existing manufacturing line. By putting both new builds and repairs on the same manufacturing line, we will improve utilization.

Let’s turn to page six. The 10% top line growth in life sciences also set the stage for improved profitability. All aspects of the business, automation, consumables and services grew and expanded gross margins. The top line of 29 million included 12.4 million in revenue from BioStorage. The adjusted gross margin for the base business exceeded 37% and BioStorage is approximately 44% for the quarter. Dusty Tenney has done great job consolidating operations and turning this business to growth. I am sure you remember we targeted $30 million revenue and breakeven for this quarter. In shortfall, it’s quite simple to ramp up our new automated minus 150 degree system to BioStore III Cryo. We expected 1 million from shipments in this business and this would have put us on a revenue target, and while we round a breakeven, this would certainly put us over the profit line. This will come and we remain confident in building the life science to positive profit in our fourth quarter on a projected 33 million of revenue. In this third quarter, Dusty Tenney took total new orders in contracts valued at $40.6 million and added net new business to the backlog for future growth.

On slide seven, you can see the strength of the balance sheet. As expected, we’re building cash in the second half of the year with solid performance in both inventory and accounts receivable. Deferred revenue dropped $8 million. You may recall that last quarter we had some shipments in our contamination control business for which we deferred some revenue. These systems were accepted by customers on schedule and we progressed life science projects which had carried deferred revenue. In total, our cash balances expanded to $72 million and we carry no debt on our balance sheet, which takes us to cash flow on page eight.

Cash flow from operations was $15.7 million fueled by improved profits and working capital performance we just reviewed on the balance sheet. Capital expenditures at $3 million are now reflecting our new normal run rate for the BioStorage business. This dividend payment of $6.9 million on this stage was our 20th sequential quarterly dividend and brings the total paid-outs since it started five years ago to a $118 million. As I said earlier, we ended the quarter with cash and equivalents of $72 million on the balance sheet and no debt. We’re pleased to -- and it’s fair to say very pleased with the balance sheet and the strength of our business model to fuel cash and growth.

Slide nine addresses the outlook for our fourth fiscal quarter of 2016. You’re seeing a range that puts us just about flat on revenue and earnings compared to the third quarter. The momentum in our higher value portfolio continues with growth in contamination control and life sciences but it is a challenge for us to completely offset the decline in the richer IP income and earnings this quarter. We will apply additional restructuring to consolidate the repair operations and will ways [ph] down some on the gap earnings estimate in the coming quarter, while positioning us for the improved earnings in 2017. But to sum up our operational forecast, 4Q revenue is expected to be in the range of the $146 million to $151 million. Non-GAAP earnings per share is expected to be in the range of $0.14 to $0.17.

That completes our prepared remarks. I’ll now turn the call back over to the operator to take questions from the line.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] One moment please for the first question which comes from the line of Edwin Mok with Needham and Company. Please go ahead.

Edwin Mok

So, my first question is on life science. Every quarter you guys had guided for $38 million for the fourth quarter, and I think you’re guiding now 10% growth would imply up for accounts 22 million. [Ph] Can you tell me what’s the difference share why is it the lower number?

Lindon Robertson

Edwin, first the point on Q4 is $33 million that’s what we are planning to. And with what we had indicated in June was about $35 million run rate as we exited but 35, to be fair 35 to 37 would have to get us to the 115. But we did run into two things that are effecting, one, slower ramp on cryo and we didn’t -- we had a range on it inside our business that could have put us higher. And we’re just being a little more cautious as we point to the fourth quarter now. And the second thing is I got about 1 million, it rounds up to 1 million but almost 1 million of impact in the fourth quarter just related to the recent shifts in exchange rates. So, I think the $33 million is really balanced now. When we first set this out, the $35 million was our targeted exit rate that sets up for 2017. And while the cryo system is just ramping a little less in revenue, just to remind you, we’re seeing orders start to percolate. So, we think that we still are well supported going into 2017 on the objectives we have. But, so, we’re going to call out that double-digit growth now for fourth quarter and track that going into 2017.

Edwin Mok

Okay, that’s helpful. You guys did provide a 30% growth for the business next year. On the BioStorage, it’s still growing as you guys suggest. What could -- is there any kind of -- I guess two-part question, first, is there any seasonality for that business that we should expect over the next two quarters? And also as you guys build this pretty strong booking pipeline right? What should we look out for potential hiccups for that continued growth?

Lindon Robertson

Edwin, we missed the very first part of your question, you said what indications we would have one BioStorage business, what kind of indications did you say?

Edwin Mok

Yes, basically one what kind of seasonality, any kind of seasonality we should expect for the BioStorage business?

Lindon Robertson

So, in large part, we’ll say no. However, we’ve highlighted that the genomics mapping services does fluctuate. And in general one, I got to put a caveat on that. We’re very new to this equation and we’re still going to observe it. But I just want to call out, so you’ll recall in December we had a substantially high month and the very first month that we owned the business. And we believe that that’s reflective of customers using the year-end budget, using their year-end budget to accomplish some of those services. So, if there is a seasonality, we believe it tends to be based on the confluence of customers’ budget years, finishing at the end of the year but just on the top level of it. But, fundamentally what we like about this model is the steadiness and that the bulk of our revenue, the base of it is already sitting in the freezers. I’d remind you that in this quarter, while we signed $41million of new contract value, we saw expansion on the BioStorage side as well as on the other side on the base business. And so, we’re adding that new business for the future for growth. So, we see no indication that the largest part of this would be steady and supports some sequential growth each quarter for the near term.

Steve Schwartz

So Edwin, just to be clear, if bookings were zero or bookings doubled in a quarter, the perturbation to revenue in the subsequent quarter would be minimal. As Lindon said, we have most of the revenue in freezers and backlog.

Edwin Mok

Okay, great. Thanks for clarifying that. Moving on to your semi part of the business. If I back out the $6 million delta from the two changes that you guys have in your business, right? It seems like that semi business outside of that is only growing low single digit, right, based on your guidance. But semiconductor market is pretty strong and you talk about your growth driver there, like contamination control and wafer level packaging which you expect continuing to grow. Is there any one or two areas that you are seeing softness in that part of the business?

Steve Schwartz

We don’t see softness but we’re pretty clear that the services business and the cryopump and industrials business is pretty flat. So, those are steady and stable profitable business but relatively flat. The growth that we see is almost exclusively attributable to the three areas that we focused on. So, we do have a significant amount of revenue, as you know in service and on the vacuum pump side.

Edwin Mok

Okay, great. Last question I have for you, Lindon, you mentioned about the gross margin improvement coming from some reorganizing of your manufacturing and your pump repair business. How much incremental margin improvement we should expect from that asset once it’s done?

Lindon Robertson

Well, first let me just highlight that the project is in motion and we expect it to be fully in place by the middle of 2017. And as we do that, you could think about that as being roughly four-tenth of a point on a quarter. It would be may be three to four-tenths of a point. So, it’s going to be incremental steps. And so what we are highlighting right now, we talked to you about -- and by the way the three to four-tenths of a point I mean on the semi solutions business. But, just as a reminder as we met with you at the Analyst Day, everyone, we highlighted some cost take out as go into 2017. So, this is the first of those steps. And over the course of the year, we’ll update you on this. But going in midway into 2017, we think that this savings on an annual basis could be -- it will hit a run rate of about three to four-tenths of a point.

Operator

Your next question comes from the line of Paul Knight with Janney Montgomery Scott. Please go ahead.

Paul Knight

Hi guys. Thanks for taking the call. My question is regarding you’re seeing increased bookings, what’s the source of it, is it pharmaceutical, biotechnology, is it academic? And then, the follow-up of course will be where do you see this -- are you seeing the increased NIH budget yet in these orders?

Steve Schwartz

Yes. So, we see the strength in orders from all of the segments that you mentioned, Paul. So, we have pharma, biopharma, academic and government. The largest customers we have obviously would be pharma and biopharma, but we see expansion now coming from other areas. We had some success in academic space recently and we intend to continue to build that out. So, we think we have a very solid offering there. And we see growth across the space. I don’t say that we can attribute anything specifically to an NIH budget because the conversations that we have with customers are generally -- they are quite long. And so by the time the customers done their diligence, they’ve inspected the facilities, they have made a decision that they will or won’t take on some of this outsourcing, the budgeting ultimately may have an impact, but right now these are decisions customers make about how they intend to handle samples. And they have an internal budget obviously for it. And sometimes they elect to outsource it. But there is a lot of strength and momentum in the business from across all segments.

Paul Knight

What do you think, is that the capacity shortages they may face or they just want to move to outsourcing in general?

Steve Schwartz

We’re seeing both actually. So, when people get to the point where they have internal storage that might be ageing, we had over the last couple of years, we had a lot of refurbishment activity. And I think some of the customers elect not to refurbish existing capacity but move it. And that’s one of them. The other thing is that as they recognize this is critical but not core, they’re really intent upon focusing their core resources internally on the work that they do that adds value and giving the sample management capabilities to people who do that as a profession and reliably manage the samples for them. So, they really focus their core spend on the places where they add value and they are content, and looking forward to the opportunity to give it company like Brooks BioStorage.

Operator

The next question comes from the line of Patrick Ho with Stifel Nicolaus. Please go ahead.

Patrick Ho

Thank you very much. Steve, just a clarification in terms of the guidance because they were few moving parts. Did I hear correctly that you said excluding the $6 million of some of the legacy business that goes away that’s reflected in the guidance?

Lindon Robertson

Patrick, let me take that just to make sure. So, we’ve given you a range of 146 million to 151, so at the midpoint we’re just about flat. We’ve seen the opportunities to be a little better. But frankly, let me just add a little more color for everyone.

When we walked in to this quarter on the semiconductor solutions side, our backlog was actually just a little lighter than what we walked into Q3, but already we’re seeing some acceleration and we’re really sorting out whether customers will take things this quarter versus the December quarter. And so, we’re putting a little range around this. And I think the best estimate right now is flat. And yes, it comprehends the swift of the IP and the drop in the atmospheric. And so underneath, this there is absolute growth on both sides of the business when you [indiscernible] or the IP income and the atmospheric.

Steve Schwartz

I was just going to add, the key point, and we had described this for the last well, really three quarters, I think we’ve address this but we’ve really put a coin on this at the Analyst Day. And this is, we really hope that our investors understand this that we saw this coming in -- that’s as all comprehended in our model. When we describe our inflection point, it’s these things, piecing, the IT and the atmospheric, we knew was coming down and is going to come to an end as we finish our 2017 fiscal year, and it’s almost -- it’s essentially finished. We’ll have just to drive more in this coming quarter, but very little. And so, that’s -- now we’ve got a clean base of growth portfolio. When I say that, we have a services business that’s stable, and as Steve said, the cryopump business, it cycles with the industry a little bit. But, the rest of the business, we’re seeing a really strong growth due to contamination, the etch and the advanced packaging and then of course on the life sciences side.

Patrick Ho

Okay, I think I’ve got that. Maybe first -- two questions on the semiconductor front. First, given the acceleration that we’re starting to see, particularly in the equipment side where if anything, we’re starting to see some pull-ins from various chip makers. How is your visibility -- or maybe the question is, is your visibility actually improving for the December quarter, given that a lot of activity is starting to pick up? How would you characterize at least qualitatively what you are seeing for the December quarter?

Steve Schwartz

So, Patrick, we’re feeling more bullish about the December quarter. And I’ll give you one specific example. When we talk about some of the Korean OEMs starting to push things through quickly and the fact that we haven’t had a lot of business from them over a period of time, it means we need to make tools that are configured specifically for them. And so, as much as they would love to have it in September, we may or may not be able to accommodate that. So right now, it’s going be at the late September or early October. But that gives you an idea in terms of the kind of capability that we’re trying to get going here in the Company. We are starting to see more positive signs about NAND build out and we have some indications that 10-nanometer capacity will go in palace that will cost shipments for us in December quarter. So, we’re feeling better about December than we -- certainly than we were even a month ago.

Patrick Ho

Great, that’s helpful. And on a big picture basis, with the consolidation and the reorganization within your Company particularly in the semiconductor side of things bringing new services and products group together, how are you I guess aligning their goals together? And I guess what I’m trying to get at is, life science services and systems tend to have their own targets and goals, was part of that reorganization trying to get them aligned on the same kind of targets and goals?

Steve Schwartz

It’s exactly it. And we’re finding actually that by pulling two groups together, the responsiveness to customers is enhanced by -- we’re probably twice as fast getting to customers. So that’s one part. And a lot of the services business that we have is actually the reconditioning, the refurbishment of the pumps and the repair of the robots. So, those are jointly linked in almost every way. And when Lindon talks about some of the consolidation that we’re talking about from a fair operation, we are now putting the refurbished cryopumps right in the same line as the new pump manufacturing. So, there is a lot of streamline impact there from just by putting the two organizations together; it pulls down any barriers that exist. So we’re seeing operating improvement and a much closer alignment between the services and the product groups.

Patrick Ho

And final question from me on the life sciences is with some of the -- I guess I don’t want to say push-outs but with some of the delays in revenue recognition for the BioStore III product. From a customer standpoint that you’re seeing, what are some of the I guess the final things that customers needs to see with the product, what’s causing some of the timing delay, is them getting more comfortable with the product itself or is it just making sure that they meet the specs that they are looking for?

Steve Schwartz

I think the issues are multiple but they’re all very much related. So, you can imagine somebody who had budgets for manual cryo system now going in for three times the budget to put the same store in. The thing that we’re absolutely certain of is the pipeline begins to grow; we manage this very carefully on a weekly basis. So, the customer pipeline is growing. The acceptance of the tools when we ship them is rapid and the customers are delighted with the product. We just see that there is a little bit extra time required to get some of the budgets pulled through. And there are no hold-ups actually from anything related to the product performance, as just a matter of the customers being able to take them. And in addition, one of the things that Lindon mentioned referred to very specifically about some revenue that we planned for the quarter. We actually had books in business; we increased the scope of it, which prohibited us from recognizing revenue on it. So, the it’s something that will come back better when we finally recognize revenue on it but because we changed scope and expanded the project, we weren’t able to recognize revenue in the quarter.

Operator

The next question comes from the line of Craig Ellis with B. Riley. Please go ahead.

Craig Ellis

Yes. Thanks for taking the questions gentlemen. I will start with one that’s a follow-up to an earlier question. So, if BioStorage III is ramping a little bit later than you had previously thought and if on the semi side some of the indications that you’re getting from Korea and other places leads you to be a little bit more confident in the December quarter, your fiscal first quarter, does that all mean that with the guidance that we have for fiscal fourth quarter that we really have a flatter fiscal fourth and fiscal first quarter trajectory that’s setting up then we would normally see, given some of the [indiscernible] you’re feeling that we’re getting on the semi side and what should be by the end of the year recovery in BioStorage III?

Steve Schwartz

Gosh, Craig, that’s a tough question to answer. We see it flat as we outlined and as we said in the September quarter; in December, it’s really too early for us to call. I think the thing that we can count on is the life sciences business generally is improving; we will see an increase in the BioStore III revenue from where we are today. And I’d be hard-pressed to tell you how many million dollars that might be. But the thing that we do feel differently about and for the earlier question, we do feel that the December quarter this year looks to be shaping up much better than the December quarter last year. So, whether it’s flat or up, it’s a little bit too early to call; we just don’t have that kind of visibility.

Craig Ellis

Sure, I understand that. I was looking for the kind of the bigger picture sense of things, Steve.

Lindon Robertson

Hey Craig, I think just to add to that too, one, the semi does cycle more, right? But let’s talk about life sciences front. We still have a lot of confidence in the 2017 model that we just put out. So, in other words, while we just said we feel little of exchange rate impact and a slower ramp in Q4, which is the September quarter, when we step in the December quarter, we’re still seeing that objective of getting to 160, which we’d say we’re on a trajectory of averaging a quarter of $40 million per quarter next year. So, one, it’s got cyclical and it ramps and we think it’s well supported both on some of the robust signings we’ve had earlier this year on store systems but also continues to add a net new business in that space as well as the BioStorage. So, I think we’re still pretty strong and even our guidance here is double-digit growth on the life sciences side.

Now, on the semi side, I want to be a little more clear that we are seeing growth in the bulk of our portfolio here. And we just are being very crisp with you all that this quarter is our pretty much our last step down from the atmospheric arrangements we’ve had with a partner and the IP. But from there if the bullishness of the semi industry is there, which you seem to be referencing with confidence and we said that there is reason to think that in the December quarter but we don’t see the orders yet, then we think that the December quarter will expand from there, assuming that that’s the case. We continue to maintain the robust growth of our portfolio, albeit two to four-point on average over a period of time better than the semi industry. So, I know I am starting to repeat some of what Steve said, but I just want to make sure because I think that the nature of the question is kind of what’s premised. When Steve said it’s difficult to answer that question, because it was premised [indiscernible] flat. Well, I don’t see it flat; I see -- I have this offset of the last step down of the piece, but the bulk of our portfolios growth. And then, when we look into December quarter, I don’t really see anything slowing us down to participate right at the industry or better.

Craig Ellis

Okay, that’s helpful for the additional detail. Lindon, you anticipated my next question, which was the confidence and the target model for next year both for life sciences and the overall piece. But, following up on a point you made with confidence in life sciences, is your confidence in that target retained because you are seeing levers in either the services business or the consumables business that can offset what might be a lower start and a lower run through the year with BioStorage III or is it because the customer feedback that you are getting on BioStorage III really means that at some point in the year, there’s just going to be a steeper slope on that ramp than you had thought earlier?

Lindon Robertson

So, I’ll answer and then, if Steve’s wants to Chime, but I will tell you that it this way. I will say our confidence is led on the two biggest pieces of the business that being BioStorage and our store systems bookings that we’ve already had in the pipeline that we see. So, both, the largest elements of that portfolio are looking really good for us.

The cryo store product is a little slower right now. We’re seeing the pipeline build. The question, we’ve always said, it’s an adoption rate and we’ve got to get the decisions made. So, if it ramps a little later, we don’t know how fast it might ramp. We will still hold that objective. We’ve said that in general, the 2017 business model will depend on that revenue element; it’s somewhere between $10 million to $20 million of revenue. So that would give you the range. If I don’t hit a $2.5 million run rate, I’m not going to be at $10 million for the year. So, that’s why they would watch for as a milestone as we get to the December and January quarter -- I must say December and March quarter that’s what I’d be looking for 2.5 million to 4 million run rate to stay on that model. And we think that’s not anywhere out of the woods. As a reminder, we just booked 1.7 million of bookings, so we have that feasibility.

And then the last piece is the consumables portion of that business. And consumables has provided fuel in the past. It’s been a little slower over the past here, but we see -- we have investments in place and we have a strategy and a consolidation of our offering and putting it in front. And one of the beauties of our business right now, and this is different than before we bought BioStorage, we could face any customer, and whatever they need for samples we have -- their needs, we have the opportunity to meet their needs, whether it would be an outsource, whether it would be a storage system infrastructure, whether it would be the service or the consumables. So, we’re positioned really well to answer every customer. And so, our sales team is in the process now in the integration step of being trained across the platform on both sides. And we see a real level of effectiveness that Dusty and his leadership team is really putting in place.

Craig Ellis

I appreciate that. And then, lastly, on the operating expense side, I’d anticipated that given some of the initiatives that have been put in place over the last few quarters that there would be a step down in the September and December quarter, I’m not sure if that was the right assumption, but that’s what I had in the model. Can you just address operating expense in the guidance and talk about how that sets you up to close the calendar year?

Lindon Robertson

So, in that inside the guidance, I actually like you asked the question. So, I think we’re going to see just about flat operating expense in the coming quarter. And what I anticipate that to be is about 1 million more in stock comp and about 1 million less in spend spikes. We had some spending spikes this quarter that we don’t see the need for the next quarter. That’s just events of the business.

Now, in terms of the restructuring, the restructuring, the savings essentially got accelerated last quarter because we had the stock comp reversals. And this quarter we had reductions driven by the restructuring, but because of the benefits last quarter, it accelerated the appearance of it in our numbers. But, if you were to look at our expense now and compare to a year ago, remember that we have observed the BioStorage structure into that as well, over the same time period. So, we’re getting that benefit. We estimate that -- and this quarter, we had about 2.7 million total structural benefits. And so, we’re not knocking at the door of getting to a 4 million run rate as we go into the fourth quarter.

Craig Ellis

And do you capture all that in the fourth quarter?

Lindon Robertson

It will be fully captured in the fourth quarter on the past restructuring. Then the pending restructuring on the repair center is [indiscernible] the middle of ‘17.

Operator

[Operator Instructions] And we now have a question from the line of Farhan Ahmad with Credit Suisse. Please go ahead. Mr. Ahmad, your line is open. Please go ahead. Mr. Ahmad, perhaps your line is muted.

Steve Schwartz

It’s okay. Mike, I know it’s a busy day for the analysts, there are several companies. So, he may have had to drop. And we covered a lot of questions here. So, maybe we covered his question.

Operator

There are no further questions at this time. [Operator Instructions] There are still no further questions at this time. I’ll now turn the call back to you. Please continue with the presentation and/or closing remarks.

Steve Schwartz

Alright. Mike, thank you very much and we appreciate your assistance. And we always appreciate everybody participating on our call, listeners and participants and then specially appreciated Paul Knight of Janney joining today and chiming in. And we certainly have a high respect for your firm. To everyone here on the call with us, thanks for your time and your interest. And we hope that we service your needs. So, let me know how we can better do that going forward. And we look forward to reporting our results of our fiscal fourth quarter and our full year next quarter. So, thank you very much.

Operator

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

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