Q1 2020 Earnings Call
Greetings and welcome to the Brooks automation Q1, 2020 financial results call. During the presentation, all participants will be they listen only mode and afterwards, we will conduct a question answer session.
Tom If you have a question. Please press the wonderful, but the four on your telephone if at any time turn conference you need to reach operator, Please press Star Zero This conference.
<unk> Thursday February six 2020, and now I'd like to turn the conference over to Mark Namaroff Director Investor Relations. Please go ahead.
Thank you good afternoon, everyone on the line today, we'd like to welcome you to our earnings conference call for the first quarter fiscal 2020.
Our first quarter earnings press release was issued after the close.
At the market today and is available on our Investor Relations website, located at Brooks Dot Investor room Dot com.
Our the supplementary Powerpoint finds the what we're using joined the prepared remarks today.
Before we start I'd like to remind everyone that during the course or the call we'd be making a number of forward looking statements within the.
Meeting as a private litigation Security Act and make a 95.
There are many factors that may cause our actual financial results or other events it different from though that the fight in such forward looking statement.
I would refer you to the section of our earnings release title Safe Harbor statement, the Safe Harbor slide on our affirmation Powerpoint presentation on our.
Website, and our various filings with the FCC, including our annual reports on form 10-K at our quarterly reports on form 10-Q.
We make no obligation to update these statements <unk> future financial data or events occur that's different from the forward looking statements would that be present today.
Also we may refer to a number.
Non-GAAP financial measures, which are used in addition to in conjunction with results presented in accordance with gap. We believe that non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with GAAP financial result, and the reconciliation of GAAP measures they provide an even more.
Understanding the Brooks business.
Non-GAAP measures should not be relied upon to the exclusion of GAAP measures got itself.
And on the call with me today is our President Chief Executive Officer, Steve Schwartz, and Executive Vice President and Chief Financial Officer, London Robertson.
We will open the call with in March with remarks from.
Steve I pilots at the first quarter and then when they will provide a more detailed look into our financial results and provide a summary of our outlook for the second fiscal quarter up 2020, and then we'll have time to take your questions at the end of the okay. How about prepared remarks, and with that I'd like to turn the call over to Steve Schwartz our CEO.
Thank you Mark and.
Good afternoon, everyone. We're pleased to report to your results from our first fiscal quarter of 2020.
We're off to a strong start to the year with Q1 revenue coming in $210 million up 6% sequentially and 17% year over year.
In the quarter, we began to witness the start of a meaningful uplift in the.
Conductor equipment market.
And then life Sciences, we delivered performance that was right on plan.
Our Q1 momentum supports yet another growth here as we have much confidence in the strength of our markets the products and services that we've developed to serve these markets and are very strong customer capture.
That said in the near term it's.
Prudent to address the impact of the Corona virus.
Today, Linden and I will do our best to articulate to how we're thinking about our business.
What we anticipate in the coming weeks and we'll share with you a range of outcomes that very mostly due to uncertainty about timing.
I will now give a recap of our business starting with life Sciences.
Q1 was a solid quarter for life Sciences, we came in essentially where we forecasted.
Revenue was $92 million consistent with our guidance and expectation and showing pro forma organic growth of 10% year over year.
We made significant progress across both sub segments and we accomplished what we intended in order to meet our goals for 22.
20.
I'll start with a review of sample management.
In sample management, we hit our Q1 operating targets that support our objective to return to double digit growth by year end.
And we made progress against the promise for a higher margin more profitable business.
In terms of our priorities for sample management.
We're focused on growth and profitability, but before I talk about growth, let me make a comment about our gross margin progress.
For most of the past couple of years, we've struggled to get gross margin out of the range of approximately 38%.
Our margin performance was not from undue pricing pressure or uncontrollable material spending but rather.
General issues that are under our control.
As we said on past calls over the past six months, we've implemented some organizational and management changes and I'm pleased to say that we're now demonstrating some meaningful progress.
In Q1, we delivered another improvements in gross margin to just over 41%.
All 340 basis points.
Above Q1 2019.
We're not declaring victory here, there's still much improvement that can be delivered but we're already operating inside of our near term target range for twentytwenty, which was to exceed 40%.
And we're solidly on a path to operate in the target range of 42% to 44% by Twentytwenty too.
Just to note the improvements came predominantly from the large twin banks systems as well as the increase in volume of shipments of the automated be three cryo stores.
Second we're determined to grow revenue by at least 7% this year.
Sample management revenue in the quarter was $52 million up 3% year over year and inline.
And with our expectations.
As we mentioned on our last call we've added more capability to our sales organization and have refocused on more high value longer term opportunities that will provide growth.
Here are few examples.
We continue to demonstrate growth in the cryo space that serves the cell and gene therapy opportunity.
We added another four new customers bring our customer count to 67.
24 of those customers now on multiple systems.
As one indicator of our momentum Q1, with our largest ever booking quarter for B three cryo system and it included orders for an additional 25 units for leading.
Jeff Company.
It will continue to be somewhat of a lumpy business as the market adoption of this innovative product line takes hold but we believe that our momentum has begun to pick up and we have great confidence that institutions that are engaged in cell and gene therapy research must have this capability for proper cryogenic sample management storage.
Retrieval and protection.
In Q1, we launched a new outreach service that is so far been well received and oversubscribed as we work with some large academic institutions and hospitals to perform onsite assessments and recommendations about their sample management and inventory challenges.
We are confident this initiative will begin to.
Add meaningfully to revenue in our second half.
But more importantly, we believe that we've developed a service offering that has adapted particularly well to this market segment and it's one of the target markets. We identified for you at our Investor Day.
And we passed the 1 million sample milestone in our new clinical research sample management offering.
A solution that provides a new level of organization and security for samples from patients were enrolled in clinical trials for large pharmaceutical sponsors.
To date, we've engaged in more than 20, 250 trials, and we're adding value by reducing sample retrieval and delivery cycles and dramatically improving accuracy and quality of sample handling and.
Management.
Each of these last two opportunities include physical sample storage logistic services and the need for robust informatics solution for the management of inventory.
It will take a bit of time for results of these investments to take hold we maintain our guidance for the year and we only gain more confidence from the early results of these programs.
We anticipate that we'll have sequential growth again in Q2, but it will likely be more than one quarter more modest year over year growth before we begin to see the shift back to high single digits growth in Q3, with a target still to get to 10% growth by Q4.
To summarize our current position and sample management.
We're in a high execution mode Q1 results were exactly on plan and we started Q2 with the same solid trajectory.
We remain confident in our recovery of this business and we are in energized by the opportunities that are in front of us.
We also delivered another strong quarter in June with revenue at 40.
<unk> million dollars was up 22% organically year over year and consistent with the impressive growth trajectory over the past few years.
When growth was powered by next generation sequencing, which was up 38% year over year.
Q1 is usually a lighter quarter for sanger sequencing as the U.S. and European holidays.
Reduce some of the demand for overnight measurements and though down a few percent from Q4, saying are still delivered 19% year over year growth as we continue to gain share with our high quality fast turn service offerings.
We added another 200 customers in the U.S. in Europe, and we continued our aggressive buildout of capability and capacity.
For the as we advance the formation of our new synthesis lab in Indianapolis, which is co located with our main sample storage facility.
We intend to be fully functioning this spring.
Most importantly, we continue to bring our scientific innovations to market, helping customer self critical challenges in securing business from new research.
Groups, who recognize our breakthrough technologies that we provide.
And it's important to note the profile and reputation the gene was carries in the scientific community.
Immediately after the outbreak of the Corona virus gene was was contacted by several global international organizations looking for help in the investigation of this epidemic.
During the past few weeks they've been fully engaged in support of numerous organizations, including centers for disease control on three different continents.
Our teams in the us in China, or synthesizing gene that code for the proteins of Corona virus and synthesizing fragments of the Corona virus genome as well as providing numerous other.
As there will be used in the detection.
Diagnosis and understanding of the outbreak development to vaccines and production of therapeutic antibodies.
Hi, laboratories, and scientists are in high demand and are fully engaged in the service at this important endeavor.
We're proud of our contribution that we consider ourselves fortunate to have the trust and support of the.
Teams, who are working around the clock to combat this epidemic.
Except for the operations team this been onsite throughout the extended Chinese new year holidays. The rest of our gene was China team as away from our labs and will be restricted from returning to work until at least Monday February 10.
Before I.
To conclude my comments about the life Sciences business I do want to make note of the significant growth trajectory, we're seeing that's driven by cell and gene therapy work.
Although still a relatively small part of our portfolio, we estimate that in calendar 2019, our business from cell and gene therapy customers grew significantly more than 80% year over year.
A number derived from pro forma increases in gene was more than 40%.
And the sample management contribution was more than doubled.
In total cell and gene therapy revenue was approximately $20 million in 2019, and this particular sub segment looks set to drive continued outsize growth for years to come.
All in our life Sciences businesses exactly on track to meet our commitments for Twentytwenty.
We're implementing structural change in the sample management business, which are delivering the results that we expect.
We still have work to do but we are doing the work and we're seeing the improvements.
Similarly, we believe that we're making well placed investments.
In June was for new capabilities and for geographic expansion and we continue to be impressed by the performance of this strong and dedicated team.
We also have a lot to discuss in the semiconductor side is once again, we continue to exhibit a different dynamic from other companies who serve this segment.
Q1 revenue of one.
Hundred $19 million was up 13% quarter over quarter, and 5% higher than the same quarter one year ago.
We had another quarter of strong market share gains by adding 23, new design wins into next generation process equipment.
Q1 revenue was essentially at our peak levels that we delivered in the June 20.
18 quarter, which was also the peak of the semiconductor equipment market.
What's more is in Q2, we are poised to deliver another new record quarter.
We believe this point to significant that highlights the value of our unique product portfolio, which is fueling these levels of performance.
These high.
And Mark revenue records are powered by foundry spending and Ccs product adoption for critical device notes.
We have not yet seen the benefits of memory spending which drives even more demand for our automation robots and systems and advanced packaging also remains well below peak levels.
The point is we still have a headroom to set new revenue.
Records, even before memory or advanced packaging returned to prior levels.
And when they do fully recover we should remain strong even if foundry spending relaxes a bit.
We have very robust sweet spot, which is supported by many different technology trends and our strong share position allows us benefits from each area and we're on track once again.
Outperform the semiconductor equipment market.
I'll give some specific color from our major semiconductor business drivers tool automation advanced packaging and contamination control solutions.
We are now squarely in the middle of an upturn of our wafer automation business and although our automation revenue is still approximately 30%.
Lower than our prior peak, we grew 12% sequentially and vacuum robots and this is on the heels of a 32% sequential increase from June to September.
We anticipate more growth in robots in the March quarter, consistent with the tier one OEM forecast increases you've heard about.
Advanced packaging was flat with Q4 19 at $10 million with a soft automotive market keeping a lid on this market.
We nonetheless had six new design wins for various automation modules, keeping us in solid position as the market for new advanced packaging continues to develop.
And ablate we've.
Had much to share with you about the ramp and our contamination control solutions business.
Coming off of a record 32 million dollar quarter in September we jumped to $44 million in the December quarter, and that's up 60% compared with December quarter, one year ago.
Majority of the volume was for FOUP cleaners that were shipped to seven and five.
Peter foundry installations.
But we're still seeing a broadening of the customer base and for applications beyond foundry.
In Q1, we added another five new customers all in Asia, extending our penetration to more customers, who are just now adopting Ccs technologies with who are not yet at the 10 nanometer technology node. These.
They're all promising signs for the future market opportunity.
Our outlook for the Ccs business. It is for another very strong quarter in March at revenue levels approximately the same as Q1.
If we leave you with one take away from our semiconductor report it this way.
Weve constructed a unique and valuable product and.
Now, let you portfolio for these times in the semiconductor lifecycle.
We grew in 2019, which was a down year in semiconductor equipment and now while a peak in the market is still a long way off.
We are at historical peak revenue levels.
The business. We have today is business that we won years ago. During the early design phases of.
10, seven in five nanometer technology nodes.
And our position is secure and getting stronger.
R&D approach remains the same.
Partner collaborate with top technology leaders years in advance of a production cycle to design and automation solution that perfectly fits with their needs for a process steps.
Then.
We locked down that design perfect the manufacturability and build volume production capability.
And today were securing our future in much the same way through close collaboration and design win activity only today. There are many more global Oems in our partnership mix.
We started 2000.
20 in a strong market environments, and we're executing at all of our sectors to ensure that we continue to capture the growth from these opportunities.
We look for this year to be our best ever.
And one in which we more meaningfully deliver the financial results from what we've built.
That concludes my formal remarks, and I'll now turn the call over till then.
Thank you Steve.
I'd like to refer your attention to the slides on our website, starting with slide three starting with a key highlights.
Growth in the quarter supported with growth in each business as Steve as highlighted we saw 38% year to year growth in life Sciences, which includes the final quarter of the.
In addition, the acquisition of gene was which occurred in November of 18 has been a positive addition to our portfolio profile fueling growth higher margins and cash flow.
Organic growth this quarter for gene was was 22% year over year simple management grew 3%.
The semiconductor.
Dr Business is also ramping as we expected up 13% sequentially and showing 5% growth year over year.
We didnt experienced a decline in 2019 that most semi capex companies did and now we return to the range of that prior peak, which is up 5% again year over year, but is also.
So 25% higher than two years ago.
The increase of momentum in this period came from the record shipments contamination control solutions chip manufacturers and growth from Bakken robust shipments to our larger Liam customers.
We had 37% growth in our non-GAAP EPS.
Over year.
Highlights driving EPS are really centered around the revenue growth in each business the growth the gross margin performance improvements in sample management and the profit profile, which we added with gene was business.
Cash flow from operations was strong for.
Our first fiscal quarter, when we pay out or variable compensation for the prior year.
The operating cash flow was 26 million in this quarter and this followed a strong fourth quarter fiscal two to 2018, where we highlighted $46 million of adjusted cash flow driven from the continuing operations.
With.
Approximately 210 million net cash available for operations and investments we have ample cash available for taking in smaller acquisitions in sizable debt capacity, if and when the next transformative acquisition materializes.
Let's move on to slide four to review the overall PML Linda.
On a GAAP basis, we're reporting 18 cents and earnings per share for both continuing operations in total company basis.
Continuing operations as an improvement from seven so to the fourth quarter and from nine cents one year ago.
On a non-GAAP basis over to the right cited the page we have reported 23 cents.
So as approximately the same as the prior quarter and six cents improved year over year.
With strong revenue growth on both the sequential in the year over year comparisons non-GAAP gross margins were stable on a total basis.
However, there are different dynamics when business segments.
The 20 basis points of improvement in the year over year comparison reflects a significant 350 basis point improvement in life Sciences gross margins.
This is consistent with the trajectory we had modeled for this year and our long term outlook and should continue to perform at this level or better.
We saw a 210 basis.
His point decline in semiconductor gross margins seek significantly affected by the mix of revenue, reflecting a rise in shipments to tier one Oems and less to the tier two Oems.
We see the second tier picking up in the second half.
For this first fiscal quarter, 44% of the revenue for the.
Order was driven by life Sciences.
So the increase of mix toward life Sciences, and the strong performance in the life Sciences margins lifted the company margins upward overall.
If I take you to the bottom line for a moment over the course of the year. There's good progress evident in net income margins and.
Yes.
But on sequential basis, we ran into a headwind.
Operating expense naturally expanded over the year with the acquisition of gene was and its related investments, but was held us back from showing additional progress in the quarter was a bubble of approximately $2 million expense related to some professional service fees primarily.
Audit and legal fees to address the material weaknesses, we disclosed in December when we filed our form 10-K.
We expect this will come down in the second quarter to less than a million and will be behind us at the end of the second quarter.
In the non operating expense lines interest expense came down from 5 million a year.
Our ago to what rounds to zero for the quarter.
A year ago, we carried significant debt associated with gene was acquisition, but we no longer have that burden.
The non-GAAP tax rate for the quarter was about 23%.
This is about three points higher year over year and five points higher than.
Fourth quarter.
A higher rate is driven primarily from the jurisdictional mix of our income.
We continue to expect the tax rate for fiscal year 20 to be in the range of 21% to 25%.
In total the non-GAAP net income increased 40% year over year and non-GAAP EPS is up 37 per.
Uh huh.
While the earnings is essentially flat sequentially at 23 cents I will emphasize that the increased professional fees put approximately two cents of pressure on the earnings in the quarter and I expect this item to lighten by one penny in Q2 and to be fully behind us at the end of the March quarter.
Turning to slide five they will discuss our segment results starting with life Sciences.
In the first quarter life Sciences revenue was 92 million up 38% year over year.
40 million of the revenue came from GE, Liz and I'll remind you that in Q1 of last year. We owned gene was for one half of the quarter as we acquired that.
Business on November 15th of till 2018.
Gene was provided 22% organic growth in the quarter.
The sample management business provided 3% organic growth year over year consistent with the expectations for the slower start of the year.
We continue to expect us to trend upward in the second half.
With stronger growth to bring us to approximately 7% for the full year.
On a pro forma calculation for the full quarter. The total segment grew 10% year over year as Steve outlined we have strengthened invested in the sales engine and are beginning to see some fruits in the pipeline for higher growth in sample management to the second.
Second half and into 2021.
Operating margins are on a clear path for expansion.
You can see this progress is largely driven by the gross margin results I will clarify here that the operating expense pressures in the quarter effects. Both segments. Similarly, and is holding back some of the margin progress.
Yes from the bottom line, which we expect to be resolved by the end of second quarter.
Driving this gross margin improvements we was indeed the performance in the sample management business and the mix benefit of full quarter of gene was.
Insights sample management, we saw another quarter of.
Winchell improvement in more than 100 basis points, which is driving year over year improvement of the 340 basis point on that business sample management margins benefited from improved performance in the product lines of our large twin banks store systems and also again from the growth of the beach retrial store systems.
Looking into the second quarter, we see momentum over the life science business, but also take some caution on the impacts which the Corona virus may have on our revenue and operations in China.
While a portion of our gene was China team has been allowed to work in supporting the critical request for battling the virus the market inside China has broadly shutdown.
Until the next week.
This has had some impact primarily on our gene was business.
In light of this we are ranging our guidance for life science revenue in the second quarter to be 90 to 95 million.
Let me be more explicit about us if we can recover the impact of the Corona buyers.
Then the momentum of the business with center the guidance at the top end of the range towards 95 million.
The lower end of the range accounts for some downsides in the event that the problem constrains, the China market longer than expected.
The current midpoint is where we center guidance assessing the two to 3 million impact from the constraints in the.
Marketplace.
Let's turn to slide six.
Semiconductor solutions revenue was 119 million in the first quarter, an increase of 13% sequentially and 5% year over year.
The increases at this point are coming from continued strength the contamination control solutions.
Primarily in our wafer carrier cleaning systems and increased demand and vacuum robots, which are shipped primarily to tier one Oems.
This ramp has not yet included any benefit of increased system shipments to the second tier Oems as anticipated at the time over Q1 guidance. This product mix does have a downward impact on the second.
Gross margins, which was down 150 basis points sequentially.
We expect more broad based demand and vacuum systems to pick to begin to pick up in the second half, which will support margin improvement through the year.
Looking into the second quarter, we see continued strength in.
Second robust to tier one Oems and are seeing pickup of the systems business. Overall, we expect the semi revenue to be in the range of 123 to 130 million.
Currently we have assessed and are not expecting the corona buyer situation to have a significant impact on our Q2 semiconductor.
Formats, we continue to monitor the situation daily.
Let's turn now over to slide seven for summary of our cash flow for the quarter.
We generated 26 million of operating cash flow and $16 million of free cash flow as referenced earlier. This is exceptionally strong cash flow for our first fiscal quarter of the year.
Year over the past six months, we have generated approximately 70 million of operating cash flow from are continuing operations.
Capex amounted to $10 million for the quarter, driven primarily by investments in operations and includes less than 2 million in the initial start of the New Jersey gene was facility in CECO China.
Yes.
The total expansion of cash and marketable securities. This quarter was 11 million, bringing the total as of December 31 to 353 million.
On slide eight you will see a summary of the balance sheet.
You can see the $353 million ending.
Conserve cash and marketable securities at the top of the December 31 column.
If you scan down the column current liabilities includes 93 million of tax obligations for the gain on the sale of semiconductor cryogenics business, which we paid in January.
You can also see we have a total of 51 million.
Million dollars of debt.
By adjusting the cash balance by the taxes paid and the debt we have approximately $210 million of net cash for operations and investments.
I'll now wrap up on slide nine.
The guidance for the second fiscal quarter of 2020.
Revenue is expected to be in the range of 213 million to 225 million.
Adjusted EBITDA is anticipated to be 32 million to 38 million in non-GAAP diluted earnings per share to be 22 cents to 28 cents per share.
We have factored in the current China environment for the Corona buyers.
With expectation that most of the Chinese economy is back to work in mid February.
In addition to this guidance. We also continue to expect to non-GAAP tax rate of 21% to 25% for the year.
This now concludes our prepared remarks, and I'll turn the call back over to the operator take questions from.
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And we have a question from the line of Paul Knight with Janney Montgomery. Please go ahead.
Hi, guys is actually Mike on for Paul Congrats on the quarter.
Hey, Mike Thank you very much.
So on the sample management side, that's obviously in the one that has been kind of the.
Most volatile that we've seen can Steve can you kind of just talk to what gives you guys. The confidence in the visibility to actually kind of could see continued ramp in the out or any other quarters and hit that 7% growth for the full year.
Sure, Yes, Mike you said it exactly right we had some volatility we've we've done a.
A lot to stabilize first the internal operations of the group picking making really good progress there.
We've added some sales capability, we focused on a couple other initiatives that I just talked about one the clinical trial samples we call sample hub started to have good traction good success and frankly, that's back to the sweet spot.
On our on our sample management capability, we can see real traction in the cryogenics business. The booking levels are meaningful at significant than those those tools will be delivered through the year. So it's not that.
It's not a sugar high we get some bookings it will distribute the tools out through the year. So we have some pretty good visibility there and frankly, the just hard work.
Laughs, we've got some contracts that were working on that we anticipate will bring in and we want to stay.
So that we're not we're not too aggressive on on the timing because we don't want to Miss on the timing. So I think we have good visibility into what the back half the year looks like worked like crazy to see if we can pull some of this up into the current quarter, but we're a little bit more confident about what Q.
Three in Q4 look like but again, it's starting to build and backlog and a lot of the customer contract activity.
Thanks, and then just on the gene was from kind of it looks like a record quarter. There can you kind of just talk too is that are result of just gene ways executing being such a great business. So you guys acquired or are you starting to see some.
With the result of combining a life science been senior customer base. Thanks.
Ladies and I want to take full credit for everything that June with is doing but frankly, it's an outstanding team.
And they were they were on a trajectory. So this is the thing that gene was knows how to do they they expand they develop capability they capture customers and they win business I think.
Contribution here so far has been that we haven't constrained capital and we've allowed some of the expansions to take place in some of the regional labs, we did a pretty significant modification of the laboratory in New Jersey to allow some of the expansion of Ngs and and frankly.
There are synergies that are beginning.
Going to show in one of the things that I see that we havent talked too much about is between the sample storage business and that gene was team. We think there are real synergy opportunities. There. We started by exchanging leads and customer contacts and meaningfully now we're starting to see.
Things transmit.
Between the two organizations that helped both businesses so.
In June with has that have been capability built and we do think that there are benefits accruing to both sides of the business and it's our it's our hope and our desire and a lot of energy or putting it to make sure that we.
Ken can occur.
Yes to both parts of the business by having them work more closely together, but the teams are doing that organically and right now we're starting to see the Cardinals of what we think is great promise for us.
Thanks for the time guys appreciate it.
Thanks, Mike.
And our next question is from John Pitzer with.
Suisse. Please go ahead.
Yeah. Good afternoon, guys. Thanks, Let me ask the questions. Steve I guess my first question just on the semi side of the business you guys had an excellent calendar year 19, with some sort of company specific drivers as we look out to calendar 20, and just kind of look at the WSE forecast that are out there you've had to at the front.
Hi, guys come out and get give somewhat different views one talking about potentially as much as 20% year over year growth and WSE. The other kind of closer to 10% I'm just kind of curious how you'd characterize sort of just backdrop to spending environment, perhaps more importantly, how do we think about your growth in that context with.
Some of the company specific drivers.
Thanks, John Thats, one of those things on our Whiteboard every day, we let me let me do my best here a couple of things are happening.
That are that are just the general growth drivers for our business, whether it's 10% or 20% growth rate the content in foundry.
10 nanometer to seven nanometer five nanometer and ultimately to three nanometer that content for travel for can have an ice control continues to go up and I will affect exponential, but it's certainly multiplicative in terms of how many tools and how much content, we have when the device node shrinks. So just even ex.
Consistent level of foundry spend from one year to the next but from one note to the next would increase our business as a fairly soft flatbed for example from TSMC, but if they went from seven nanometer to five nanometer flat spend at the Capex level would be an increase for us because they put more of our our.
Cleaning tools and as an example by the same token the complexity of the device spend for the vacuum processes for really sophisticated deposition and etch steps at a higher number of higher count of those process steps as what we saw in the 17 18, 19 timeframe, where we have a lot more vacuum.
Technology content, so that even in.
A down semi environment. We grew so we anticipate that those trends are continuing into twentytwenty.
Having said that I'd be hard pressed to tell you if it's a 10 or 20%.
Number, but if it's 10, we anticipate we'd outgrow that if it's 20.
We would anticipate we'd outgrow that for the for the same reason.
So partnership so just not to put words in your mouth, but despite outperforming.
Last year, you don't think that the hard the harder year over year compares prevent you from out of performing this year again.
Yes, John that's a that's a really good question just because of the high level.
Well a foundry spend.
We it gives us a lot more confidence if foundry fell off and and we were relegated to the things that warrant high end foundry, we probably be back we still anticipate we'd be higher than the industry, we'd probably be closer to it we would have such as such a big gap between our performance in industry.
Performance is how is how we think about that.
That's helpful. And then just on the Corona virus I. Appreciate you guys sharing thoughts and Im just kind of curious.
If you've embedded any sort of uncertainty around the virus in the semi business and is it only revenue uncertainty are you trying to curtail expenses in the.
Quarter to kind of match so some of the revenue uncertainty or will you spend regardless I guess the question being is if the revenue. It certainly doesn't show up is there a lot more leverage in the March quarter earnings.
Yes, that's so John let me try it this way we look at our supply chain and it feels like we're covered for the.
Quarter, and so we don't we don't anticipate issues. We do have things that that are that China would impact, but we we think we've managed those pretty well the thing that we would not be able to account for is for example, if a fab didnt take product or if if part of the supply chain prohibited.
A different supplier, who puts a critical sub components into an OEM, who suddenly can't ship a tool for another reason they may not need to take our robots. For example, if they had other recent that couldn't get tools shipped.
But right now our semi forecast is is pretty solid based on how we look at it so we.
We don't have we don't have much risk hedge built in there on corona buyers, but but we are paying close attention. We think our supply chain is secure but if if a customer couldn't open a fab to take tools that would have an impact in it but if another supplier had trouble with their supply base and couldn't get.
Components that shutdown the.
And then that would have an impact on us.
And then just my last question a pure life Science question you guys have done a good job on the gross margin over the last several quarters you talked about 42 to 44 by 2022 I'm. Just wondering if you can talk about yielded drivers that gets you there and how we should think about the.
Any equity from from here to their over that time periods.
Yes, John I'll chime in here in.
And as you know Steve's managing simple management pretty closely nowadays.
I'll give him the option to to chime in as well.
But our primary dynamic as.
We said before is really driven a twofold one the growth of gene was a natural helping gross margins and.
And this was the last quarter of a mix benefit just speak to the contribution of the incremental acquisition a year over year next year, it'll be a full or next quarter. It will be a full compare year over year on a gene.
Was mix, but but the growth has been faster is at this 20% plus trajectory. So it so thats a nice mix benefit but more in the equally in more impactful is the performance step function that we've been able to see opportunity around on.
Simple.
Management insight sample management, it's largely around product shipments not the services as much services been pretty stable and nice margins, but but the product shipments is significant and this includes some cost of materials, but more so cost of quality and cost.
Cost of.
Labor in those quality and or project management steps in this is where we've been able take a fair amount cost out I'll highlight that as we've disclosed before.
As Steve stepped in we did take a senior.
Executive from our development quality.
The head of semi development, who had already helped to influence the life Sciences business in the past years, especially when we first building the business from the strength of our cryogenics based semi business, but he's now stepped in and in full time and sample management.
On the qualities.
The site and applying those semi disciplines. So already seen we've already seen the impacts of his actions, but theres still more opportunities laying there to be to be gathered. So so we see more traction but to so really reinforce what we call was is what happened and that is.
Some significant improvement in the systems, the large systems, most notably and then we got another.
Nice benefit as we are ramping this speech, we cryo system, it's really coming from the size of that business and critical mass and an improved margins from that not not so much of cost issue, but just on size.
So both of these are we expect to continue to help and carriers and.
And Weve this isn't a territory that's completely foreign to US we had been above 40%.
Three plus years ago, and we've been struggling with us, but I think we've really we feel confident in the trajectory here for the.
The rest of the year being above Fortys I should save above 40.
As Steve highlighted we struck 41, plus and getting to 40 to 44 seems pretty reasonable for us going into next year.
Thanks, guys.
Yes. Thanks.
And we have a.
And from Craig Ellis with B. Riley FBR. Please go ahead.
Yes, thanks for taking my questions.
I appreciate that Steve I wanted to follow up on some of the earlier questions on semi to start.
First. The example, you gave when you talked about some of the strengthen the business and maybe mission.
Directed at Ccs, seven five et cetera increased content intensity clearly, we've got a very strong foundry and logic spending environment. Now is your sense that some of the strength that you're seeing in the business jet is related to memory or is increased memory spending still in front.
In the business in something that we see later in 2020 and potentially 2021.
Craig Thanks.
For sure on the Ccs side, it's heavily foundry spending right now and we don't see much at all at this moment from memory and so we'll draw conclusions from that.
We do anticipate that some of the vacuum automation systems that we shipping, though our our from memory, but it's difficult for us to tell.
However, having said that pretty stupid part is foundry, but the customer base for the Ccs products is now.
More than 70 different customers.
And.
So we anticipate that that when when memory does pick up we'll start to see some of the shift from maybe from foundry goes in goes into memory, but right now our understanding is that still.
That's still coming behind the pretty significant foundry logic spent.
How are you feeling about CES Ccs this capacity.
At this point, Steve mentioned look out over a 12 to 18 month period.
We're we're meeting some pretty good we made through a pretty good ramp and we're not constrained at all.
If business picked up.
30%, you'd probably hear us growing a little bit we've we've got good supply base good.
Good.
A good partner on the contract manufacturing side and they've kept up extremely well.
Frankly, a year ago, we wouldn't have anticipated levels like this but I think we had enough advanced look in preparation that feels pretty good. So we're we're about at the levels that that.
Feel really good to us.
But anytime you anytime you get to a threshold like this.
Are we thinking about what we do when you have the next ramp like this are you have to have these kinds of capacity levels, but what we do have room to move we can't do it quickly and at the moment, there's not a need to do it quickly we think we've got.
The current quarter covered as.
Well and it gives us a little bit of breathing room, if we need to be able to find a way to add some more systems.
Got it and then switching to life sciences, Thanks for giving us the data point on cell and gene therapy at 20 million last year I can you just talk a little bit more about the things that products is doing to grow in that area and how should.
Investors think about the multiyear revenue potential that's in front of the company from a base that is small but is clearly getting bigger pretty quickly.
Sure. So it's Craig I'll give you a couple that give you a couple of data points here one from the gene was side and one from.
The from the cryogenic side of the system.
And it's interesting we're starting to see the same customers there and we do anticipate that ultimately vsom convergence of opportunity satisfying the research side the sample management side.
One of that one of the things that we're really proud of is that recently and Craig I didn't know if this will mean.
Particularly like to you, but some people on the call it well.
And I'm working to make sure that it means a little bit more to me as I get a little smarter about it but gene with has developed among other things of proprietary technology, that's related to a particular virus and Avi TR.
Which is a.
A necessary construct.
For people, who are doing research in the cell and gene therapy space and it's extremely hard to sequence through but the delivery of the the therapeutic on a virus is accomplished by this construct and gene was has proprietary means by which.
So they can read.
Read this construct in its unique in the industry and they beta launched it last summer and the acceptance has been.
Overwhelmingly positive a lot of enthusiastic people participating and that's something we rolled out just recently beyond the us.
To Europe, and China, and Theyre reception has been extremely extremely strong and we see the customers continuing to come to gene with when you when you see us and hear US talk about this incredible customer capture it's not just the centers for disease control that know about the capability gene was it's the researchers who are in the around this space.
And when we when we imagine how big opportunities might be it's tough for us to gauge, but we do know billions of dollars are being spent on the research for cell and gene therapy and the gene with team has focused initiatives on how to support how to support that capability and and if you mentioned.
Our sequencing.
Two people in around this space they would have to tell you about the complexity of it and this equity of it.
All still wouldn't know about the ability to sequence through at the but like the gene with team can do but we're we're really proud of that capability and really excited about it and inside the walls.
The company you hear people.
Looking about that.
The other one is I'll talk about some of the cryogenic activity and again this is where on the cryogenic side, we're getting a lot closer to understanding the science and whats necessary and so we're building new skills and scientific capabilities inside the cryo team as well, but in the first quarter, we continue to make progress with.
The next week with car T.
Immunotherapy leaders in the market, we shipped one first store to a customer and a follow on store to a second.
These are customers have a very strong interest in the product line in various configurations and its to support their R&D their quality.
Oil and our whip of the of the products that they manufacture for approved gene therapies and cell therapies and so that's that's an important one because it down the road from just how do I manages from our recent standpoint, what do I do to construct a complete manufacturing cold chain cycle and what were.
Or finding is that although the early products are really related to what our call the telogis immunotherapies.
There's a lot of R&D going on a next generation allogeneic therapies and that's why there's an expansion of the.
Of these cryo systems people need to maintain not just maintain the samples, but they need to begin to develop.
The means that they will handle them so that they can get the approval from the FDA in terms of what's there what's their GMP in terms of how to handle the sample. So we're we're excited we're enthusiastic each one of these customers has pretty significant demands on us as a relatively small company, we give them full attention about the format say needs.
The test that they need to be done.
But we don't see.
We don't see anything but considerable upside.
And as we go forward I think that it's noted from Greg from you and some others were on the call that we'll we'll try to do a better job to let you know how we're doing in the growth in the cell and gene therapy space.
And we'll try to report to you, but we see it considerable upside across the company I'd be hard pressed to put a number on it but the initiatives. We have we think are right in writing the center of what's going to be necessary for growth and development in this space.
That's helpful and then the last one before I hop back in the queue lending is I'd look at the segment dynamics.
Quarter on quarter, we've got a rapid semi growth then we're we're flatter in life sciences, unless there isn't that.
Corona virus.
Risk that that Youve earmarked bad, but it seems like there would be a downward drift in gross margin at a segment basis I'm not sure whats going.
And on sub segment basis can you just talked about the puts and takes in gross margin and and then if you can what you might see should look out to the June quarter. Thanks.
Sure.
Really.
I think freight now I would.
Guide that in the center of our guidance for a second proximately stable margins.
On a sequential basis, so semiconductor while we're starting to pick up for example in systems, it's not as much in the vacuum systems that quite broad based as what we expect to see in the second half of our fiscal year. When that comes back we expect our gross margins in semi to come back to levels that we're seeing this last year.
And.
And then the.
Life Sciences bait space while.
Well expect to have a little bit of benefit additional benefit in sample management.
I think overall in our financials here, we're counting on just about flat stable gross margins and.
As a little there is a bit of question on gene was in terms of the impact that we carry.
In the in the China space on the krona virus and the impact on operations. So right now would be in.
I don't want to describe it as conservative I think were being responsible and the guidance that we've given you in around the flat margins.
Thanks, guys.
Thanks, Thanks, Craig appreciate the attention.
And we have the question from Shake of Johnson from Stephens. Please go ahead.
Hey, Thanks for taking my question would be interested in your latest thoughts on the Indianapolis facility I think you announced a 20% capacity expansion couple of weeks ago just.
Interested kind of where capacity stands today and how much is being utilized currently.
Yes.
You know this this is.
Reinforcement of what's happening in Indianapolis and in in the storage footprint and.
Then.
It what's happening is we are pushing.
The last step of our warehouse space that we had gathered but I want to put this in the right context. The warehouse space that we have is in industrial park near the airport and I mean, it's a nice industrial part and.
And we had had rights to expand into certain.
An additional I'll call it cavities or the next.
Phase of the building and we expanded one more and we made the investment to fitted out that fit out includes the electrical and the air conditioning around it and it gives us that 20% increase and put it in context.
Up up until that time since the beginning of when we've owned it in 2015, we've just about double the footprint of the site and so this is another step.
Probably consistent on an annual basis.
And reflects the growth that we see in and and I'd highlight.
That.
I have often described this as a variable capex, we take this step of investment in this setting this up but we don't fit the freezers and until the week before we see samples coming in so we generally have put a few freezers and as the demands coming in and.
And we have that set up so you.
Some of you have seen photos that I've shown but it's just empty racks of.
Of electrical harnesses ready for the freezer drop in right right in a row and Thats, what I call. It a variable capex, we don't have idle fees are sitting in the.
For very long is just a few of just ahead of demand.
So I appreciate your attention on that side of the marketing release.
Hi, Thanks for that window, and then just just one other question.
Just on 2020 EPS guidance, if we put together first quarter results in the second quarter guidance. It implies kind of a back half loaded year.
From your comments it sounds like you've got some visibility into a strong second half, but I'd just be curious any additional thoughts you have as we think about how 2020 plays out, particularly on the EPS line.
Yet so.
I think point number one is there's nothing that we have crossed or seeing that.
Takes us off of the viewer trajectory that we plan for the year.
So we had always.
If you go back over our remarks I'd just highlight that we saw the semi.
Through verbal.
Indications of what was going to happen from the time prior to our Investor day that we would and we had a very.
The strong order load in September all around contamination control gave us a good sense and additional groundwork for discussions on what would happen on our other customers and and so while orders don't come in generally until the quarter before in semi they gave us a strong indication that the.
First half was going to write on contamination control and we were starting we're really pleased to see the start of the ramp in September and then again in December of the tier one Oems, which confirmed everything that you would be hearing in the market as well.
Then in Meanwhile, we also shared with you that that the systems.
Business, we didn't anticipate would be coming back you know insight. This first half that it would be more of a second have come back possibly start to tick up in March quarter, and Lo and Behold. This is exactly what's happening. So so we have.
We have confidence in that and so as a as a included in.
One of the other questions I'll comment again with that coming back we do see improved margin profile and thats in the business in the second half because those systems business in the more broad based customer business, both even even in contamination control, but especially around systems will provide a.
A little broader and more robust gross margins to leverage with the growth.
Now on the life Science business.
With a caveat of this.
Hesitancy on the Corona virus in the in the second quarter, which we perceive and believe will be a.
I was not a none is significant hesitation for the year given if that holds true. We're very encouraged for the reasons. Steve outlined that gene was continues to have a very significant year with a 20% growth.
For the year and in fact, we are seeing the momentum that some of.
These developments the highlighted the VIP our capabilities the the.
Actually the relying upon gene was by some of the CDC organizations and the heightened critical nature of some of that businesses actually helping to strengthen relationships and.
As us to more and more.
Engagement set of institutional level. So we're encouraged by that momentum and so nothing there would change and then on sample management's really is on track and a hammer home here.
Gross margins were on.
And above the objective that we had for the average for the year even in the first quarter. So margin profile is solidly in place as you would expect that's more in our control influencing demand we've had traction in the opportunity pipeline and it is developing around the things as Steve highlighted and we.
We see have some visibility to line of sight of that producing opportunities in the second half and.
And we're very encouraged on the other developments of particularly around cell and gene therapy in the in the beach require momentum. So everything so far is really on the trajectory that we talked about we had a couple hesitations one.
That thrown a virus secondly, I dealt with a little more opex here in the first half than than I would've liked to have done we'll get that behind us but.
Yes, we expect to second half the told you I don't have any reason to back off.
Model.
Got it thanks, London.
I think.
Thank you.
And I believe that's all told we have for questions I'll turn the call back to Linden Robertson CFO.
Yes. Thank you very much Scott and we sold appreciate the Ascension and the interest that we get and and we always see a significant amount of interest immediately.
After the call's as well and we welcome that.
Our camera introduced default for for US here, but is active everyday with our investor phone. We invite you to fall in and reach out to him used by in his contact our IR website, and we look forward to seeing you through between now and the next quarter, but certainly look forward as.
See on the next call. So thank you very much.
That does conclude the call for today, we thank you for your participation in the last how you. Please disconnect your lines.
Yeah.
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Sure.
Okay.
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