Azenta - Earnings Call - Q3 2016

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Q3 and Fiscal Year twenty sixteen 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. As a reminder, this conference is being recorded, Thursday, July 2836.

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

Speaker 1

Thank you, Mike, and good afternoon, everyone. We would really like to welcome each of you to the third quarter financial results conference call for Brooks fiscal year twenty sixteen. We'll be covering the results of our third quarter ended June 30, and then we'll provide an outlook for the fourth fiscal quarter ending September 30 this year. A press release was issued after the 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 the Form 10 ks and our quarterly reports on the 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 the 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'll 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 30, which as I remind you is our fourth quarter of the fiscal year 2016. We'll then take your questions. During our prepared remarks, as I mentioned, we'll be referring to the slides available to everyone on the Investor Relations page of our Brooks website.

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

Speaker 2

Thank you, Linden. Good afternoon, everyone, and thank you for joining our call. We're pleased to have the opportunity to report the results of the third quarter of our fiscal 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 the semiconductor and life sciences markets as we continued 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 $148,000,000 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 positions and as a result of the significant restructuring actions we took one quarter ago, we are progressing on our growth and margin targets as we head toward fiscal twenty seventeen.

I'd 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 nine percent in the quarter. Our Semiconductor segment is the combination of what we formerly referred to as Brooks Product Solutions and Brooks Global Services. Inside of BSSG, we are benefiting from the positive upswing that's coming from three d 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 1, we are very focused on three rapid growth vectors in semiconductor, the combination of deposition and etch, contamination control and advanced packaging. This is our fuel and what drives our expectation 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 resumed vacuum automation growth in the September 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 are needed 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 high temperature and critical placement accuracy that are compounded at seven and five 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 are positioned well for any type of fab expansion. In our Contamination Control Solutions business, revenue jumped from approximately $6,000,000 in Q2 to $16,000,000 in Q3. We are particularly pleased not only with 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 four memory customers.

Additionally, we further solidified our leading market position as we shipped five food 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 segment. Further, we observed that the number of food cleaning steps increases by 20% to 40% with each smaller technology node. And because of our keen focus on next generation chemistries, we are confident that we can continue to grow in this market. Our back end Advanced Packaging business was very strong as we shipped products to 14 customers and achieved another record quarter at $11,000,000 Already, we find ourselves at the end of our third quarter with almost as much Advanced Packaging revenue as in all of fiscal twenty fifteen.

The business was fueled by some additional shipments for tools that were installed at TSMC's Infoline. And although we do not anticipate additional expansion at that customer until Phase two begins in 2017, there's still demand building for other advanced packaging fan out 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 1, when we described in some detail the transformation that we've affected in our semiconductor business. We explained that in the formation of our product portfolio, we have intentionally defocused on atmospheric robots as stand alone components as they become highly commoditized. Consistent with this direction, we announced one year ago that we have mutually agreed to wind down our Yasukawa Brooks joint venture and with it our atmospheric robot distribution agreement in North America, thus bringing this ten year relationship to an amicable conclusion. The last of our revenue from this arrangement occurred in the June 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 $7,000,000 per quarter. This revenue has all but ended as of the June with less than $1,000,000 contribution forecasted for the September and zero after that. From September onward, we will have a clean, stable portfolio and the progress that we will demonstrate from quarter to quarter will be fully attributable to continuing operations. This is exactly why we talk about being at an inflection point. When we reach the September, our revenue will come from products matched to 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. Three d 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 in demand from our Korean OEMs who predominantly serve Korean IC makers. They've been relatively quiet for more than a year, but they're 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 $29,000,000 up 10% sequentially and up 73% from the June one year ago. Most importantly, 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 $1,500,000 which rounds to the breakeven objective we had 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 twenty fifteen, we had operating loss of $17,000,000 in Life Sciences. In the December, we lost $4,000,000 but we told you that we were on a path to cut that loss in half in March, which we did, and that we would get to breakeven in June, and we are there.

Most importantly, we forecast growth again in the September 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 product 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 go 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 $41,000,000 BioStorage revenue increased by another $1,000,000 and we added 12 new customers.

We had $1,700,000 in bookings from our family of Ultra Cold cryo products, including our new BioStore three 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 have started out slower than our initial estimates. Given our strong pipeline, we expect revenues from the BioStore three cryo business will exceed $1,000,000 in the September.

And we will keep you informed about our progress as we grow this important new suite 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 stores 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 twenty seventeen. Our complete portfolio of offerings is proving to be much more than the combination of automation, consumables, services and informatics. We now have the ability to offer solutions to any set of issues a customer has as it relates to ensuring that any sample, every sample can be delivered to any site at any time with 100% precision with a complete guarantee of quality and a 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 the 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 $6,000,000 decrease in the revenue stream I mentioned earlier. We are positioned and structured to continue to improve profitability and you should expect steady progress on all fronts as we conclude fiscal year twenty sixteen. We've already initiated further efficiency improvements for which we expect to see benefit from in 2017 And we are confident in our ability to drive additional profitability in the business. That concludes my prepared remarks. And I'll now turn the call back over to Lindon.

Speaker 1

Thank you, Steve. Please refer now to the PowerPoint slides available on Brooks' website under our Investor Relations tab. To start the remarks, I draw your attention to Slide three, which is a consolidated view of our operating performance. Top line revenue increased 9% sequentially to $147,500,000 driven by a 10% increase in Life Sciences and a 9% increase in Semiconductor Solutions. The GAAP net income was $8,600,000 or $0.12 per share supported by the 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 margin increased 2.2 percentage points to 37.5, reflecting higher margins in both Life Sciences and Semiconductor Solutions.

We also saw lower R and D spending and lower SG and A. In the prior quarter, we had $1,600,000 benefit to operating expense from the reversal of accrued incentive based compensation for employees separated from the company. 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 11,100,000.0 of non GAAP net income or $0.16 per share, more than double the prior

Speaker 2

quarter. As we look

Speaker 1

at our segment revenue outlined on Slide four, I highlight the change of reporting segments as a result of our recent restructuring. Beginning this quarter, we are reporting operating results in two segments: the Brooks Semiconductor Solutions Group, which includes all products and services to support the semiconductor and 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 continue to benefit from the expanded opportunities of wafer level packaging and the increase in etch and depth processes at the fab. In Life Sciences, we saw sequential double digit growth from the legacy business and nine percent from the recently acquired BioStorage business. The quarter I 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 the semiconductor and the life sciences businesses. Let's go to Slide five and get deeper into each. The 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 to $16,000,000 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 $29,000,000 included $12,400,000 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 a great job consolidating operations and turning this business to growth.

I'm sure you remember we targeted $30,000,000 of revenue and breakeven for this quarter. The shortfall is quite simply the slower ramp of our new automated minus 150 degree system, the BioStore three cryo. We expected $1,000,000 from shipments in this business and this would have put us on a revenue target. And while we round to breakeven, this would have certainly put us over the profit line. This will come and we remain confident in building the Life Science business to positive profit in our fourth quarter on a projected $33,000,000 of revenue.

In this third quarter, Dusty's team took total new orders and contracts valued at 40,600,000.0 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 $8,000,000 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 balance has expanded to $72,000,000 and we carry no debt on our balance sheet, which takes us to cash flow on Page eight. Cash flow from operations was 15,700,000.0 fueled by improved profits and the working capital performance we just reviewed on the balance sheet. Capital expenditures at $3,000,000 are now reflecting our new normal run rate with the BioStorage business. This dividend payment of $6,900,000 on this page was our twentieth sequential quarterly dividend and brings the total paid out since it started five years ago to 118,000,000 As I said earlier, we ended the quarter with cash and equivalents of $72,000,000 on the balance sheet and no debt. We're pleased and yes, 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 twenty sixteen. 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 of the richer IP income and earnings this quarter. We will apply additional restructuring to consolidate the repair operations that will weigh us down some on the GAAP 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 146,000,000 to $151,000,000 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.

Speaker 0

Thank you. One moment please for the first question, which comes from the line of Edwin Noch with Needham and Company. Please go ahead.

Speaker 3

Great. Thanks for taking my questions guys. So my first question is on Life Science. Every quarter you guys had guided for $38,000,000 for the fourth quarter and I think your guidance now 10% growth would imply around $32,000,000 Can you tell me what's the difference there? Why is it a lower number?

Speaker 1

Edwin, first, the point on Q4 is $33,000,000 That's what we're pointing to. And with what we had indicated in June was about a 35,000,000 run rate as we exited, but but 35 to be fair, 35 to 37 would have to get us to the $1.15. But I, we did run into two things that are affecting, one, a slower ramp on the 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've got about a million. It rounds up to a million, but almost a million of impact in the fourth quarter just related to the recent, shifts in exchange rates.

So I think the 33,000,000 is really balanced. Now, when we first set this out, the 35,000,000 was our targeted exit rate to set up for '17. And while the cryo, system is just ramping a little less in revenue, just to remind you, we're seeing the orders start to percolate. So we think that we still are well supported going into '17 on the objectives we have. But so we're going to call out the double digit growth now for fourth quarter and track that going into 2017.

Speaker 3

Okay, that's helpful. Yes, you guys did provide a 30% growth for the business next year. On the biostorage, it's still growing as you guys have suggested. What could is there any kind of seasonality for the I guess two part question. First is, is there any kind of seasonality for that business that we should expect over next few quarters?

And also as you guys build this pretty strong booking pipeline, right, is there what should we look out for potential hiccups for that continued growth of that business?

Speaker 1

Edwin, I think we missed the very first part of your question. You said what indications we would have on the BioStorage business? What kind of indications did you say?

Speaker 3

Yes, mean, just what I'm talking about Any kind of seasonality we should expect for the BioStorage business?

Speaker 1

So, you know, in large part, we'll say no. However, you know, we've highlighted that the genomics mapping services does fluctuate. And and in general, one, I gotta I gotta put a caveat on it that we're very new to this equation, and we're still going to observe it. But you I just wanna call out to you recall in December, we had a substantially high month in the very first month that we that we own the business, and we believe that that's reflective of customers using their year end budget using their year end budget to to accomplish some of those services. So if there's a seasonality, we believe it tends to be, you know, 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. The I remind you that in this quarter, you know, while we signed $41,000,000 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 net new business for the future for growth. So we see no indication that the largest part of this would be steady and support some sequential growth each quarter for the near term.

Speaker 2

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

Speaker 3

Okay, great. That's thanks for clarifying that. Moving on to your semi part of the business. If I back out a $6,000,000 delta from the two changes that you guys have in your business, It seems like your semi business outside of that is only growing low single digit, right, based on your guidance. But it seems like the market is pretty strong and you talk about a few of your growth driver there, contamination control and wafer level packaging, which you expect continual growth.

Is there any one or two area that you're seeing softness in that part of your business?

Speaker 2

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

Speaker 3

Okay, great. Last question I have for you, Linda, you mentioned about the gross margin improvement coming from some reorganization of your manufacturing and your problem repair business. How much incremental margin improvement we should expect from that efforts once it's done?

Speaker 1

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 twenty seventeen. And as we do that, you could think about that as being roughly, you know, four tenths of a point on a quarter. It would be, maybe three to four tenths of a point. So it's gonna be incremental steps. And so what we're highlighting right now, we we told we talked to you about, and and by the way, the three to four tenths of a point, I mean, on the semi solutions business.

But just as a reminder, we met with you at the Analyst Day, everyone, we highlighted some cost takeout as we go into 'seventeen. 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, you know, could be it'll hit a run rate of about, three to four tenths of a point.

Speaker 3

Great. Actually, that's good color. Thanks. That's all I have.

Speaker 0

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

Speaker 4

Hi, guys. Thanks for taking the call. My question is regarding you're seeing this increased bookings. Where's the source of it? Is it pharmaceutical, biotechnology, is it academic?

And then the follow-up of course will be where you see this. Are you seeing the increased NIH budget yet in these orders?

Speaker 2

Yes. So we see the strength in the orders from all of the segments that you mentioned, Paul. So we have pharma, biopharma, academic and government. The majority 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 the academic space recently, and we intend to continue to build that out because 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're quite long. And so by the time the customer has done their diligence, they've inspected the facilities, they've 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 their samples. And they have an internal budget obviously for it. And sometimes they elect to outsource it. But there's a lot of strength and momentum in the business from across all segments.

Speaker 4

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

Speaker 2

We're seeing both actually. So when people get to the point where they have internal storage that might be aging, had the over the last couple of years, had a lot of refurbishment activity. And I think some of the customers elect not to refurbish existing capacity but to 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 capability 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 their content and looking forward to the opportunity to give it to a company like Brooks BioStorage.

Speaker 3

Thank you.

Speaker 0

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

Speaker 5

Thank you very much. Steve, just for a clarification in terms of the guidance because there were a few moving parts. Did I hear correctly that you said excluding the $6,000,000 of some of the legacy business that goes away that's reflected in the guidance?

Speaker 1

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

When we walked into 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 slip 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, forgive us for the IP income and the, atmosphere.

Yeah. And then

Speaker 0

that yeah.

Speaker 2

Yeah. Go ahead.

Speaker 1

I was just gonna add. The key the key point, and we we had described this, you know, for the last, well, really three quarters, I think, we've addressed this, but we really put a point on this at the Analyst Day. This is we really hope that our investors understand this, that we saw this coming, and this is all, comprehended in our model. When we describe our inflection point, it's these things, the the IP and the atmospheric, we knew was coming down and was gonna come to an end as we finish our 2017 fiscal year. And it's almost well, it's essentially finished.

We'll have just to drive more in this coming quarter, but very little. And and so that's now we've got a clean base of growth portfolio. When I say that, we we have a services business that's stable. And as Steve said, the cryopump business, you know, 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 depth, the advanced packaging and then, of course, on the life sciences side.

Speaker 5

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 given that a lot of activity is starting to pick up? How would you characterize at least qualitatively what you're seeing for the December?

Speaker 2

Patrick, we're feeling more bullish about the December. 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'd love to have it in September, we may or may not be able to accommodate that. So right now it's going to be at the late September, 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 the NAND build out and we have some indications that 10 nanometer capacity will go into place 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.

Speaker 5

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 your services and products group together. How are you, I guess, aligning their goals together? And I guess what I'm trying to get that is, you know, a lot of times 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?

Speaker 2

It's exactly it. And we're finding actually that by pulling two groups together, the responsiveness to customers 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 robot. So those are jointly linked in almost every way.

And when Linda talks about some of the consolidation that we're talking about from a repair operation, we're now putting the refurbished cryo pumps right in the same line as the new pump manufacturing. So there's a lot of streamlined impact there from just by putting the two organizations together it pulls down any barriers that exist. So we're seeing operating improvements and a much closer alignment between the services and the product groups.

Speaker 5

Great. And final question for me on the life sciences and, you know, with some of the, I guess, I don't want to say push outs, but with some of the delays in getting the revenue recognition for the BioStore three product, From a customer standpoint that that that you're seeing, what are some of the, I guess, the final things that customers need to see with the product? You know, what's causing some of the timing delays? Is it them getting more comfortable with the product itself? Or is it just making sure that they meet the specs that they're looking for?

Speaker 2

Yeah, so I think the issues are multiple, but they're all very much related. So you can imagine somebody who had budget 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's a little bit extra time required to get some of the budgets pulled through. And there are no holdups actually from anything related to the product performance. It's just a matter of the customers being able to take them. And in addition, one of the things that Lyndon mentioned referred to very specifically about some revenue that we planned for the quarter, we actually had booked some business.

We increased the scope of it, which prohibited us from recognizing revenue on it. So it was 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.

Speaker 5

Great. That's really helpful. Thanks a lot guys.

Speaker 0

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

Speaker 1

Yes. Thanks for taking the questions gentlemen.

Speaker 6

I'll start with one that's a follow-up to an earlier question. So BioStorage three 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 lead you to be a little bit more confident in the December, 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 than we would normally see given some of the late calendar year fill in that we're getting on the semi side and what should be by the end of the year recovery in BioStorage III?

Speaker 2

Gosh, Craig, that's a tough question to answer. We see it flat as we outlined and as you said in the September. In December, it's really too early 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 three revenue from where we are today.

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 per the earlier question, we do feel that the December this year looks to be shaping up much better than the December 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.

Speaker 6

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

Speaker 1

Craig, I think just to add to that too, one the semi does cycle more, right? But let's talk about life sciences for a moment. 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 a little bit of exchange rate impact and a slower ramp in Q4, which is the September. When we step into the December, we're still seeing that objective of getting to 160,000,000 which would say we're on a trajectory of averaging a quarter of $40,000,000 per quarter next year.

So, one, it's not cyclical and it ramps in we think it's well supported both on some of the robust signings we've had earlier this year on store systems, but also continuous add of 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're 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, you know, if the bullishness of the semi industry is there, which you seem to be referencing with confidence and we said that, you know, there's reasons to think that in the December, but we don't see the orders yet, then we think that the December will expand from there, assuming that that's the case.

We continue to maintain that robust growth of our portfolio will be two to four points on average over a period of time, better than the semi industry. So I know I'm 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 premise. And when Steve says it's difficult to answer that question, because it was premised then, woah, it sounds flat. Well, I don't see it flat. I see I have this offset of the last step down of a piece, but the bulk of our portfolio is growth.

And then when we look into December, don't really see anything slowing us down to participate right with the industry or better.

Speaker 6

Okay. That's helpful additional detail. And you anticipated my next question, which was the confidence in the target model for next year both the 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're 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're 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?

Speaker 1

So I'll answer and then if Steve wants to chime in. But I will tell you 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 BioThreat the CryoStor 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 somewhere between 10,000,000 to $20,000,000 of revenue.

So that will give you the range. You know, if I don't hit a $2,500,000 run rate, I'm not going to be at $10,000,000 for the year. So that's what I would watch for as a milestone as we get to the December and January quarter I'm sorry, December and March quarter. That's why I'd be looking for 2,500,000.0 to $4,000,000 run rate to stay on that model. And we think that that's not anywhere out of the woods.

As a reminder, just booked $1,700,000 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 year, 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 be an outsource, whether it be a store system infrastructure, whether it 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 of 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.

Speaker 6

I appreciate that. And then lastly, on the operating expense side, I had 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?

Speaker 1

Yes. So in that insight, the guidance, I actually like to ask the question. So I think we're going to see just about flat operating expense in the coming quarter. And what you'll what I anticipate that to be is about our about $1,000,000 more in stock comp and about $1,000,000 less in spend spikes. We had some spending spikes this quarter that we don't see the need for next quarter.

I mean, that's just the 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 kind of accelerated the appearance of it in our numbers. But if you were to look at our expense now and compare it to a year ago, remember that we've absorbed the BioStorage structure and that as well over the same time period. So we're getting that benefit.

We estimate that, in this quarter we had about 2,700,000, total, structural benefits. And so we're knocking at the door, of getting to a 4,000,000, run rate as we go into the fourth quarter.

Speaker 6

And do you capture all that in the fourth quarter?

Speaker 1

It will be fully captured in the fourth quarter on the past restructuring. Then the pending restructuring on the repair centers will start in the middle of twenty seventeen.

Speaker 0

Thanks guys.

Speaker 1

Great. Thanks very much.

Speaker 0

And we have a question from the line of Faram Ahmad with Credit Suisse. Please go ahead.

Speaker 1

Hi Farhan, how are

Speaker 3

you there?

Speaker 0

Mr. Ahmad, your line is open. Please go ahead. Mr. Ahmad perhaps your line is muted.

Speaker 1

Okay. Mike, I know it's a busy day for the analysts with several companies so he may have had to drop and we've covered a lot of questions here. So maybe we covered his questions.

Speaker 0

There are no further questions at this time. 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.

Speaker 2

All right. Mike, thank you

Speaker 1

very much and we appreciate your assistance. And we always appreciate everybody participating on our call, listeners and participants and I especially appreciate Paul Knight and Jani joining today and chiming in. And we certainly have a high respect for your firm.

Speaker 0

To

Speaker 1

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.

Speaker 0

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