Q3 2019 Earnings Call
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Jason Hormann HR and May end.
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Hello, everyone and thank you for standing by and welcome to the Brooks automation at Q3 2019 financial results now during today's conference all telephone participants will be in a listen only mode. Later, we will conduct a question and answer session.
Now that time, if you have a question you can queue up over your phone by dialing one four on your telephone keypad.
Can you just speak to the operator at any time, you can do that by dialing Star Zero. Now quick reminder, today's call is being recorded August Onest 2019, and it is now my pleasure to turn the call over to Mark Namaroff Director of Investor Relations. Please go ahead Sir.
Thank you David and good afternoon, everyone on the line today, we'd like to welcome you to our third quarter earnings Conference call for Brooks for fiscal 2019 ended June Thirtyth.
Our earnings press release was issued after the close of the market today and is available on our Investor Relations website located at Www Dot Brooks Dot com as our supplementary Powerpoint slides that will be using during the prepared remarks today.
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 Security Act of 90 95.
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 to you to the section of our earnings release titled Safe Harbor statement, the Safe Harbor slide on our permission Powerpoint presentation on our website.
And our various filings with the SEC, including our annual report on Form 10-K , and our quarterly reports on Form 10-Q .
We make no obligation to update these statements should future financial data or events occur that differ from our forward looking statements presented today.
In addition, we may refer to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP.
We believe that non-GAAP financial measures provide an additional way of viewing aspects of our operations and performance when considered with GAAP financial results and a reconciliation of GAAP measures. They provide an even more complete understanding of our 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 President and Chief Executive Officer, Steve Schwartz, and Executive Vice President and Chief Financial Officer, London Robertson.
We will open the call with Mark with remarks from Steve on our business strategy and the highlights of the third quarter.
The Lynden will provide a more detailed look into our quarterly financial results and provide a summary of our financial outlook for the fourth fiscal quarter and full year ending September thirtyth.
We will then take your questions at the end of her remarks.
Before turning the call over to Steve I would like to remind everyone that we we've completed the sale of our semiconductor cryogenics business on July 1st the first day. Following the end of the third quarter on which we are reporting.
Reporting commentary reporting and commentary and guidance in this quarter focuses on our continuing operations.
And with that I would like to turn the call over to our CEO Steve Schwartz.
Thank you Mark and good afternoon to everyone on the call with us today.
We're pleased to report to you on a solid progress against our 2019 objectives and to have the chance to provide you with some color as to what we see for the remainder of this year.
Revenue in the June quarter was $204 million up 3% sequentially with positive contributions from life Sciences and semiconductor.
Meaningfully even in a weak semiconductor capital equipment environment, we grew our semiconductor business quarter over quarter.
On a year over year basis revenue was up 18%, mostly from the addition of gene was inorganic growth in sample management.
This increase in life sciences more than compensated for the relatively modest 5% decrease in semiconductor, which was our first year over year decline this cycle.
With this positive momentum as a backdrop, we report the results of our June quarter, and we've reemphasized that for the foreseeable future. Our focus will continue to be on growth and margin expansion.
Our markets provide tremendous opportunity to achieve both of these objectives and we're focused on execution to make sure that we deliver on the promise of this strong portfolio.
As you are aware, we have two growth businesses made up of several sub sectors each with their own unique growth characteristics.
This portfolio allows more dependable growth, even with variability in each sub sector, which will be evident in the examples we illustrate today.
I'll begin with life Sciences.
Our life Sciences revenue came in at $88 million up 77% from one year ago made up of 37 million dollar contribution from gene was and 5% organic growth from sample management.
We remain particularly pleased with the execution. The gene was which is on a trajectory for 20% growth this year.
In the quarter Jean was delivered record revenue from each of its three major service lines Sanger sequencing.
Next generation sequencing and gene synthesis, and incredible customer capture adding more than 140, new customer accounts.
Sequential revenue growth of $4 million or 13% in one quarter is a testament to the momentum we have in the gene was business as well as the ability of the company to expand quickly.
Our gene was business is also set up for good fourth quarter.
We are growing at rates above 30% in our San Francisco Bay area.
Boston and Continental European sites, and we're investing to expand our physical footprint in our two largest sites, New Jersey, and Suzhou, China to make sure that we can stay ahead of the opportunity that's unfolding in front of us.
Overall gene, which is demonstrating exceptional growth and the level of customer capture that will lead to more upside potential.
Most importantly, we continue to develop new processes and services that are enabling breakthroughs in the new science of cell and gene therapy.
Needless to say these are busy and exciting times at Jean Louis.
In sample management, we delivered 5% organic year over year growth slower than last quarter and below the expectations, we had coming into the quarter.
But with market penetration indicators continuing to support a more robust growth rate.
Specifically in the June quarter, we booked another $60 million and we added another 45 new customers.
Yes, we delivered only $51 million in revenue.
And though we continue our strong customer capture and year to date, we've built almost $20 million in additional backlog, we've not been as effective and converting these wins to revenue.
We are keenly focused on addressing our slower revenue growth, but we believe it will take us a couple of quarters to see meaningful progress.
So until we put some real points on the board will guide to a similar pace of revenue growth and flattish gross margin profile.
We don't except these levels of satisfactory, but we do require systemic solutions before we can instill confidence in our forecast.
We remain enthusiastic and confident in the tremendous opportunity presented by this business segment. There is no shortage of market interest and we certainly have orders that can sustain higher growth.
At issue here is that we've guided growth at a rate that the market opportunity in business capture could support.
But operationally could not deliver and we will fix this.
Before I move to the results for semiconductor I do want to highlight that we have continued to see more signs of meaningful adoption of our ultra cold cryo products for management of some of the most valuable samples in the cold chain.
In Q3, we shipped 12, the Hthreec units, primarily for cell and gene therapy sample management applications and four units for IVF clinics, where our solutions offer unprecedented sample protection and security this required for high value biological samples.
In addition, we shipped our second unit of a fully automated single sample handling prior storage system to a large pharmaceutical company in Europe .
The driver here is the management of sales for cell and gene therapy development. The same driver that's the source for much of the growth opportunity in our gene was business.
Revenue from the cryo products was $2.5 million, our biggest quarter, thus far and we have a backlog of orders, which is strengthening as customers recognize the value of our highly differentiated automated solutions.
We are beginning to see a higher level of repeat orders from existing customers and we believe that we are nearing a tipping point for the adoption of our automated cryo sample management solutions.
Overall, we anticipate another growth quarter in life Sciences.
As I mentioned, we remain bullish, but we will be a bit cautious on sample management guidance as we need some time to make sure we get traction, but we do expect growth in both life Sciences Subsectors in the September quarter.
Now, let's move to the semiconductor business segment, where the results were once again strong while somewhat counter intuitive and certainly worthy of some explanation.
We had a very strong June quarter with revenue up 3% sequentially and off only 5% from the same quarter, one year ago, which was our peak.
Overall year to date, we are still up 5% for the first three quarters of fiscal 2019 compared to the same period one year ago.
Significant outperformance, we think when compared to most of the semiconductor capital equipment space.
Once again, we have some unique dynamics, which are noteworthy as it relates to the growth as provided by our portfolio.
Because of our position and contamination control solutions and advanced packaging applications.
Two secular growth drivers weve been guiding that we had confidence that we can outgrow the semiconductor capital equipment market by two to four percentage points.
What we've seen in reality is that the market adoption of these two capabilities has been even more dramatic propelling us to a higher level of outperformance relative to this space.
Furthermore, we believe that this inertia will continue for the foreseeable technology nodes.
Now to some specifics.
Similar to what we reported last quarter, our vacuum robot business continued to be consistent with the lower level of shipments for our tier one OEM customers.
That said, we did see a sequential increase of 16%, but off of a low level.
And we forecast another sequential increase in vacuum robot revenue in the September quarter, which gives some indication that inventory seems to have been burned off and that this may be the start of some sustained increased activity, albeit at levels that are still well below peak levels of 2018.
Automation systems business was up quarter over quarter and year over year with tier two OEM business as the driver.
Once again advanced packaging proved to be a star delivering another record quarter at $19 million up 16% from last quarter and up 21% year over year.
Year to date, our $53 million in advanced packaging revenues, just shy of the $56 million, we delivered in the entire fiscal year 2018.
And we had another very solid quarter from a contamination control business with revenue of $29 million down slightly from the $30 million, we delivered last quarter, but up 34% from the June quarter, one year ago.
It's important to note that although we're pleased by the steady performance of the Ccs business. We are not surprised that it's outperforming the semiconductor capital equipment space.
As we've highlighted to you over the past years. This relatively recent technology addition.
Is the key to yield improvement because of the advanced Chemistries that are now required to produce state of the art integrated circuits.
We foresee demand for our Ccs products continuing to increase in the future.
Specifically, we know how the industry has rapidly adopted these technologies as measured by the breadth of our customer base.
In just the last five years, we more than doubled the number of Ccs customers to more than 60 with customers distributed across foundry logic memory and many other applications.
We now have customers in every geographic region and what may be a surprise our greatest number of Ccs customers are in China.
So for a business that originally was almost solely dependent on top tier foundry, we've established a broad technology base with global presence.
Contamination control solutions are here to stay and we are exactly in the right spot to address these critical customer needs.
And as I mentioned in a moment, we are poised for yet another leg up in this business.
As we move to our outlook for the semiconductor business for the next two quarters. We believe that it's useful to let you know how we are processing the signals that are coming from our customers and why we think our September quarter might be a bottom for our semiconductor business.
After a record June quarter for China business, which was the fifth consecutive quarter of sequential revenue increases from China.
We anticipate a slowing of some of our automated systems business in our September forecast.
That said our share position is very strong our design activity remains perfectly intact, and we're extremely well positioned for continued successful business in China.
We believe that this slowdown as the result of some of the train versus trade restrictions that are impacting Chinese investment in the near future.
That said, we forecast our vacuum robot business to increase again in the September quarter.
Meaningfully the majority of the increase is for robots to tier one OEM tools that will ship to logic and foundry applications.
Shipments to tier one OEM customers for memory.
We will remain at low levels.
Advanced packaging, although still difficult to forecast remains a secular driver and we believe it will still hold up compared to the front end equipment shipments.
And finally, we have strong signals about the expansion of our contamination control solutions business as order activity has been particularly robust in the past weeks.
Based on our backlog and customer delivery requests, we predict that the December quarter will be a record quarter for Ccs.
As we are already at risk of selling out of capacity in the December quarter, we work to pull some of the Ccs demand into the September quarter. So that we can avoid capacity constraints that could occur in December .
So in the near term these mixed market segment behaviors in combination reduce our semiconductor forecast for the September quarter, but were bullish about a pickup in December .
That said, we could see a 5% to 10% drop quarter over quarter from the June quarter to the September quarter.
Overall, we're in a very strong position for continued growth.
Life Sciences markets are robust and semiconductor appears to be stabilizing.
Our focus in the September quarter will be on the improvement of the sample management revenue conversion and preparation for the potential for a meaningful increase in our semiconductor business in December .
Finally, I want to comment on the implications of our completed sale of the semiconductor cryogenics business unit.
As you are aware during the past few quarters, we were busy executing on two sizable transactions the sale of our semiconductor cryo vacuum business and the acquisition of gene was.
But during this period, we did not stop exploring next target opportunities.
The addition of gene was puts us decidedly into the science of genomics and dramatically increase is not only the size of our available market.
But also the size a number of acquisition targets that could be valuable contributors and good fits with our offerings.
We believe that we have a strong pipeline of target opportunities that can add significant value to shareholders combined with a strong balance sheet that will enable us to execute on these opportunities if and when they become available.
That concludes my formal remarks, and I'll now turn the call over to London for more specifics about the quarter and our outlook for Q4.
Thank you Steve.
I'd now draw your attention to slide three of the presentation materials summarizing the third quarter highlights, which Steve has already touched on the quarter provided growth and margin expansion.
3% sequential growth in both segments with benefits from well rounded portfolio and operating margin expansion in both segments and for total growth on a sequential and a year over year basis.
The subsequent closure of the sale of the Cryogenics business has enabled us to reset the balance sheet on July Onest, we collected the proceeds from the sale used a portion to substantially reduce our debt and increased our available cash by approximately $55 million.
I will also highlight that we received an upgrade from one of the credit rating agencies. This month.
The strength of our balance sheet improvement in our portfolio and our track record all contributed to this.
Additional opportunities have us very excited we've continue to accumulate significant incremental design wins in semiconductors.
We had a total of $188 million or I'm, sorry, 188, new customers added to the life Sciences segment just in this quarter and we are supporting investments in geographic expansion for gene was in Europe , and China and in North America.
These are all strong opportunities as we move forward.
And of course, we have the balance sheet to acquire additional capabilities and customer relationships with a continuous focus on the pipeline of potential acquisitions.
Let's move on to slide four to see that and discuss the company overall results.
Our total revenue of $204 million grew 18% this quarter compared with Q3 last year and grew 3% sequentially.
As already highlighted both segments expanded sequentially and there are several exciting growth dynamics, which I will summarize as we get to each segment on a year over year view, we have significant growth driven by the addition of gene list, which we acquired in November 5% organic growth and sample management and a 5% decline in semiconductor solutions, which is still strong performance relative to our industry peers.
Looking at our GAAP earnings were reporting Tencent earnings per share on a total company basis. As a reminder, that sale of semiconductor cryogenics business closed on July one the day after the third quarter centers.
Discontinued operations contributed nine cents to the total GAAP earnings.
On a continuing operations basis, we had net earnings of one cents per diluted share, which is five cents above the prior quarter. As you can see revenue growth combined with gross margin expansion and expense management provided for healthy operating margin expansion.
Looking below operating income on the GAAP side still interest expense was stable sequentially, but if you will note a favorable health of 9 million this quarter in the sequential comparison due to the debt extinguishment cost in the prior quarter.
Offsetting this is an $8 million increase in the GAAP tax GAAP based tax expense.
The increased tax charges reflect the late regulation change in this quarter related to the transition toll tax under the tax reform.
This.
While this change drove additional expense of $4 million did not affect the cash taxes paid.
This shift let's shift focus to the non-GAAP results on the right side to get a clear view of our performance during the quarter.
non-GAAP gross margins for the quarter were 42.4% for the company and improvement of 230 basis points year over year, driven by strength in both semiconductor and life Sciences.
On a sequential basis, you will also see continued improvement of 40 basis points.
non-GAAP operating margins reached 12.7% expanding 90 basis points sequentially and year over year, driven by improved gross margins and operating leverage in the business.
The leverage you see in the quarter to quarter sequential comparison is all performance driven while those dynamics you see in the year over year comparison include the mix impact of adding gene was to the business along with the performance improvements in sample management and Incent semiconductor solutions.
The total result is 27% growth in operating income on just 18% growth in revenue.
Looking below operating income on a sequential basis again, we had a full quarter of comparable interest expense in both Q2 and Q3.
But on a year over year basis, the interest expense increased by $6 million masking the progress in operating margins.
As discussed as disclosed previously we have reduced debt by approximately 90% on July one following the closure of the divestiture, which will eliminate most of the interest expense.
To wrap up on the non-GAAP CNL discussion I highlight that the 20 cents earnings per share is a 16% improvement over the second quarter.
While it is down one penny year over year. This quarter was burdened by higher interest expense, which we have now reduced significantly going forward and the EBITDA measure growing 9% sequentially and 30% year over year is particularly helpful. This quarter in viewing the progress on profitability with the LTM interest and the tax dynamics.
Moving on to slide five let's review life Sciences.
Revenue for life Sciences in the third quarter was $88 million up 77% year over year, reflecting the addition of gene was and the 5% organic growth in central manager.
Overall, we remain very pleased with the business direction and the opportunities lets hit the highlights of gene was first and then I will also address the slower growth in single management revenue relative to expectations.
So the second full quarter of ownership of January . So it is the first opportunity to check the performance picture for momentum under the Brooks umbrella.
And the momentum is strong turning and $37 million in revenue and providing 13% sequential growth, which was well supported across the platforms of Sanger based sequencing and next generation sequencing as well as in the gene synthesis offerings. The revenue momentum correlates with the addition of the customers, which Steve highlighted.
In sample management revenue came in at $51 million, which reflects 5% organic growth from the prior year and total most all sample management business lines grew year over year, but performance was slower than forecasted.
As Steve highlighted we saw a nice ramp in the automated Thethree cryo systems.
And though the systems remain small with just two and a half million in revenue. We are encouraged by the growth the expansion of the customer base and the repeat orders.
On the flip side large automated store systems revenue remained challenged down 11% year over year in the third quarter.
We had previously described a line of sight to a higher number but were impacted in the quarter by delays in certain anticipated orders, which would have converted to revenue during the period and also had some issues in customer site readiness for system installations.
We have implemented changes and expect improvements in managing these challenges.
Total life Science gross margins were 43.3% 70 basis points up from the second quarter. This reflected gene with gross margins of 51% up 160 basis points from the second quarter performance and sample management gross margin softening 70 basis points still rounding 38%.
The 510 basis point expansion from Q3, a year ago, primarily reflects the favorable mix impact the bedding gene was to the portfolio.
Looking at operating profit, we also see 500 basis points expansion year over year, driven by the mix effect of gene was and performance improvement sample management.
We also see strong margin expansion of 120 basis points compared to the second quarter as income grew 23% to $6.2 million.
Looking forward, we see continued revenue expansion in the fourth quarter.
We expect that the momentum gene was to contribute.
Growth and our continuing on a more modest level of growth in sample management are counting on a more modest level of growth sample management I should say.
We are targeting total life science revenue to be $90 million or better in the fourth quarter.
Life Science revenue in the fiscal year is now expected to be in the range of $330 million.
This is comprised of gene was landing an approximate 20% growth for the year when compared to 2018 prior to our ownership and an organic growth of approximately 7% in sample management for the fiscal year.
We will continue guiding sample management expectations more conservatively until we demonstrate consistent improvement.
Let's turn to the semiconductor business on slide six.
As a reminder, we present.
These results on a continuing operations basis.
Revenue improved 3% sequentially this quarter to $116 million.
On a year over year basis revenue was down 5%.
This reflects the significant slowdown in tier one customer demand consistent with the industry.
Offsetting this to achieve the overall results we saw growth in various areas and as Steve highlighted. These included vacuum systems advanced packaging contamination control solutions, and then on a sequential basis, the vacuum robust going into tier one also saw an uptick in revenue.
I would like to highlight the results of the radical soccer business, which we acquired in April of 2018, or a $16 million purchase price.
In the past 12 months.
And a low cycle of the semiconductor capex business, we've exceeded $34 million of revenue and the radicals Dr business.
As Steve indicated the increase in design wins and qualifications provide promising.
Opportunities across or contamination control offerings, including both food cleaners and reticle stockers.
On the gross margin line, we saw improvement of 10 basis points compared to second quarter, and 80 basis points year over year.
The continued stability in year over year improvements here reflect the transformative value of diversifying our portfolio into new and higher value product offerings, and providing applications into tier two Oems of fab end users.
This gross margin expansion combined with expense controls resulted in better than balanced growth at the operating income line with margin expansion on both compares sequentially and year over year.
Let's turn to slide seven which summarizes our cash flow.
In the quarter, we produced $36 million of operating cash.
This was up from $16 million in the second quarter Capex was a normal 6 million.
Consistent with last quarter, resulting in free cash flow of $30 million.
We paid out $7 million in dividends to shareholders in the quarter and finished the quarter by adding $20 million of net cash to the balance sheet to arrive at a total of $160 million of cash and marketable securities.
And the acquisition and debt lines the year to date cash flow statement includes the sourcing of funds through debt to make the gene was acquisition on November 15th.
You will not see the paydown of the debt until the year end financial statements. Since we closed the prior sale and reduced debt on July one the first day App.
First day of the fourth quarter.
Let's move on to the balance sheet on slide eight.
There were no significant movements on the balance sheet inside the quarter inventories decreased as did trade payables.
As I just noted the debt balance will be substantially reduced.
For next quarter.
With the divestiture at closing we received payment of the cash price on July one we estimate that net proceeds will land at $550 million. After we settle taxes and fees associated with the transaction.
We have applied the majority of the $550 million to reduce debt by $495 million and have kept the remainder in cash.
I can at this out to say that as we enter the fourth quarter, we have approximately $215 million of cash and cash equivalents available for use in operations and investments, while only carrying $52 million of gross debt.
Let's turn to slide nine and look at the guidance for our fourth quarter fiscal.
Fourth fiscal quarter of 2019.
We expect overall revenue to be in the range of $192 million to $200 million.
Our non-GAAP earnings per share is expected to be in the range of 21 to 26 cents.
Given results to date for 2019, we now expect the full year to be approximately $775 million in revenue.
And we believe this will bring 75 to 80 cents of non-GAAP earnings per share.
This has life sciences revenue at about $330 million in semiconductor solutions at approximately 445 million.
With the significant changes in the portfolio completed this year the growth.
And the potential for leverage we have built into the business segments.
And with a reset of the balance sheet that sets up for another chapter of investment.
We invite you to join US for the Investor Day on September 17th in New York City.
As always the lines will be open joined from wherever you are sitting.
So this concludes our prepared remarks ill now turn call back over to the operator to take questions from the line.
Thank you and ladies and gentlemen, if you would like to register for a question you can do so by dialing one four that's wonderful, but four on your telephone keypad right now.
Now youre going to hear three tends to acknowledge your request and please remember if you're using a speaker phone to lift the handset from the receiver before entering that request. So once again to queue for questions. It's one for one followed by the four on your telephone keypad right now.
Okay.
Okay first question coming from the line of Craig Ellis You May proceed.
Hi, Thanks for taking the questions and congratulations on closing the sale and.
Yeah, and clean up the balance sheet guys. So I wanted to start just by making sure I understood the dynamics going on within sample management.
Within the life Sciences segment, so with respect to the the reset and growth expectations is that really impacting.
The systems business or the services business or both of those businesses.
Yes, so Craig it is actually impacting both of the businesses the systems business was down and the.
The sample management portion of the business. This the storage portion of the business, although still growing with slower than we experienced over the past couple of quarters.
So Steve what what is it that you're looking at issue make changes to that business too.
To close the gap back with where you think that the businesses growth should be relative to industry growth. What are some milestones that we can look out look out over the coming quarters that will help us see that that's getting back on the proper growth trajectory, yes, Craig a couple of things one we needed as you are aware, we need to continue to manage the the dependability of the stores business. This is something that ought to be a little bit more in our control.
We we did have some impact of the ability to get some systems book to be able to recognize revenue, but still the drop is bigger than than causes from from the lack of bookings, which actually will fall into this quarter. It's more about operational issues. How do we make sure that we stay on track delivering that the tools the.
To the customers on time, so thats. One this is really operational issues for us to manage and in the sample management again, we think the bookings in the order patterns are still strong.
The variability in that business comes from things that are associated with the alliance on the.
Genomic side of that business, the non gene with stuff the things that we run for renters.
And our ability to get samples registered and manage the.
The ins and outs of the customer request on that business. So that for US a feel strong from a backlog standpoint. That's just we see we saw something a little bit unusual in this particular quarter, but still the sample counts are coming in the growth in that business is generally good its the peripheral portions of that that are different from the.
The bias toward sample management, but rather the touches that we have on those samples and.
The peripheral things related to.
The alliance revenue and transport if you will that kept us from haven as robust of growth rate. So again things that are better for us to manage some of the.
Issues associated with the sample counts as long as we continue to win sample business continued to register them over the long term that will be a good steady growth business for us.
Okay.
[laughter].
[noise] quicker manner, if you'd like to get for questions. It's one for one following the four on your telephone Keypad next question coming from Paul Knight You May proceed.
Hey, Steve how big is an automated store system shipment a one project.
On a on a big sample store, it's roughly a million dollar tool if you will and on a biased or three cry with a 100 to 150 K kind of tool.
And.
Can you give us a little history is that the automated store system. That's the biggest problem or or can you talk to that.
Yes, Paul Paul Let me out in.
So a typical shipment it may be a single store that would be a million, but it's not unusual for us to have a.
Call it a $1 million to $3 million.
A project with a customer where it might be an extra long store or a might be multiple stores on the large side.
We're still handling the smaller.
B three cryo shows more and.
Single and sometimes.
Shifting to our three at a time, but but those aren't the challenge the bigger the challenges on the large store systems.
So in getting projects to yield.
I'll just add a couple of.
Comments on this we had.
A situation, where we know we had inventory in hand, and that we were starting to tune it towards specific customer opportunities.
And.
In fact.
We have been able to get booking but wasn't able to get it inside the quarter. So we had line of sight to it but we didn't we didn't achieve it in the quarter, we had confidence of getting in but we didn't get it.
And Weve had project delays relative to customer sites and installation costs.
And were impacted as a result of that so there the issues compound themselves a bit we see a path to so work and improve our way out of this.
And when I say that we recognize we've said that before.
A couple of times over the last.
Past year, but.
And so we're going to be a little more conservative and calling it but I would emphasize.
These are significant opportunities to continue to come to us we have.
No a good pipeline of opportunities that we're working currently.
Really good.
Opportunities.
In its expanded.
Sometimes we have.
More opportunity in Europe than in the us and sometimes it's the other way around and then in the past year, it's increased in China as well. So so we're encouraged on the breadth of the opportunity continues to expand but we've got to get better execution.
Okay. Thank you.
Yes.
Next question coming up from the line of Amanda Scarnati you May proceed.
Hi, Thanks for taking the question.
On the semiconductor side, we've been hearing from <unk>.
Players in this case, the logic and foundry business is coming a little bit more to have fleet at this year. It seems a little bit more strength. There can you just talk a little bit about what you're seeing in the sector and how that plays into your guidance for down 5% to 10% in the September quarter with growth in the December quarter.
Sure Hi, Amanda this is Steve so.
As you said and as everybody has started to give indications.
Logic and foundry.
Feel like a second half pick up and as I mentioned, we're going to have some vacuum robot pick up the decrease for us in the quarter is likely related to some of the tier two foundry in particularly the opportunities that have been that have been.
Feeding revenue here for the last quarters related to business in China.
So without question there is a pause there, but we still continue to see strength.
In contamination control in advanced packaging.
And as I mentioned, a slight pick up in vacuum robots for the second consecutive quarter, but on the systems business, particularly related to China were going to see that slow.
In the September quarter.
That said as I mentioned, we have a pretty significant backlog built here in the contamination control with.
Request for really significant deliveries in the December quarter.
And then I think you also mentioned that with the Ccs business that you might well some of that into September quarter was that also built into that down 5% to 10% or would that be something that would happen later on in the quarter. An addition to today's guidance. Yes are our best estimates are factored in right now into what the September and December quarters look like.
Oh and then the last question I have if I kind of on the margin expansion in the life Sciences business and what seems to be somewhat reasonable it in that market. I know you had its fifth street myself included are our modeling quite substantial pickup in end markets and that business and haven't really seen it yet.
If you could just talk a little bit about the margin trajectory.
In that business.
Yeah, Amanda I will talk about that in and of course, it it tends to be a.
An aggregation of a bold sample management and gene was what we both frankly on the operating margin line, we do see the trajectory.
Of the models would be.
Quite comparable.
Over the longer term and when I say longer term, we'll give more of an update on the four.
In our Investor day, but as we see volatility for example on sample management it dropped down.
And in while we saw acceleration, 13% growth, we've got nice leverage out of.
Gene was when we look at them separately. So in total they came to 7% both positive year over year improvements.
I should say on sample management and gene was contributing nicely but.
If I move up to the gross margin.
No I've highlighted before gene, which is expected to range between 47% to 51% were at the high end of that range and that has a quite a bit to do with the.
Period of investment and the utilization of that investment and whether we have.
Utilizing it with with.
The high percentage of capacity.
Utilization in it's not a number that I can size or a metric that I can hit for you, but as we make those assets and investments on productive and people productive because we make resources.
Are there in place obviously on the gross margin side of sample management.
Hi.
Anticipate improvements there as Steve said.
Our guidance is factored in a more flat gross margin around 38%, we still see the objective to be.
In a reasonable.
Time period to be 42% to 44% and we have convictions to get there, but in the near term what I put in here is about the.
40, I'm sorry, the 38.
38% range.
So let me pause see if ive addressed your question. If you if you want to last more feel free.
No I think that that's great. Thank you.
Okay. Thanks Amanda.
Quick reminder, for everyone if you'd like to give a question. Its one for one followed by the four on your telephone keypad.
Next question comes from the line of Patrick Ho You May proceed.
Got it thank you very much.
Steve maybe just following up some of your commentary about the softening with the tier two players.
In China.
Which sounds reasonable given the the the capacity build that they've had over the last several quarters can you give a little color in terms of your progress working with the local Chinese equipment Oems as that industry. So that's the kind of growth you've got major players already like a Netflix what's your I guess penetration whats your efforts there in getting into some of those companies.
Yes, Patrick at last Count, we had 13 OEM companies in China were customers of ours. So we see continued expansion whenever they win a new design win every when an application.
You know, we have a vacuum robot for sure and a lot of instances, we have a vacuum system.
And we also have some atmospheric systems business, there and that's probably more because we can get them to market very quickly with a technology will be accepted by the fab. So the breadth is is really strong the amount of design activity that we have dedicated to China over the past couple of years.
Has been significant and we see from a.
From a market share and market position standpoint were extremely strong in China again, because new new commerce can focus on their process technology and have a very dependable process tool when they when they ship it into a into a fab and especially its especially important when it's just next week.
Tool from one of the tier one Oems that just have to perform.
Great that's helpful and maybe moving to the life Sciences side of things on the sample management and some of the core operational issues you've mentioned.
In delivering the systems to customers is this something that supply chain related.
Procurement of parts.
Is it more just I guess your own internal operations of putting assist them together.
And then delivering it to customers.
So Patrick I'll tackle that you know I'm not going to suggest that we never have a supply chain issue. In fact, if you went back.
Couple of years ago that was a pretty systemic issue for us but we.
Managed that a year ago, we managed through you know redundant.
Cost of moving some of the supply chain in house, but what's what's hitting US right now is less with that and I think the manufacturing and supply chain team is as demonstrate some improvements there we got to those root issues.
But it's more about the project management from the bill to the install on.
Getting projects completed and some of that is managing the timing.
Coordination between us and customer some of us getting shipments out.
So well its execution to get it out the door.
I'd say, probably two thirds of the issue is.
At the customer delivery side, not that's a significant part of the cost.
As you are setting up the system you pack up the system you ship, it and Thats, where the actual assembly takes place.
I don't put at all at the feet of that customer site. So.
This is a management issue the.
Our project management team is.
Well in tune with the importance of getting this fixed.
We've made some changes.
To address it specific to project management and to the granularity of the management process.
And then Scott.
A lot of attention on it.
So I think we expect to see progress and I would encourage our investor base to expect that progress and all I'm, suggesting is in our financial guidance, we havent taken into the guidance, yet and because we're not going to disappoint you again, so we're going to deliver on what we put on the on the page and hopefully as we can work our way above that.
We'll start to pleasantly surprise and then we'll start working our way back up to the longer term projections.
Okay, Great. Maybe then that's my final question Bobby.
Well on those comments Lyndon.
Is this one of the key drivers for the sample management gross margin expansion.
Trajectory that you're talking about if you get some of these issues fixed you you got to start pushing it passed 40%. So stark is this a big component of it.
It's.
A portion, yes, but but it's also the growth so as we grow we gain really good leverage on both.
Gross margin, particularly operating margin up to where we are in the curve on operating margin is highly leveragable.
So we'll see gross margin come with growth in sample storage services in.
In particular in our India site and our related sites around that business, but also in the full utilization of of resources and fixed cost around.
The store system. So yes project management is a little is a bit of the issue currently on making expectations.
Both delivering systems revenue.
But also in the longer term I'll get leverage out of gross margin to get us up to the 42 plus level it will.
Include the growth equation.
Great. Thank you very much.
Thanks, Patrick.
We have a follow up question from the line of Craig Ellis You May proceed.
Yes, thanks for taking the follow up question and it's really a clarification and then a question. So the clarification hitting at least versus my models.
London operating expense came in about 3 million better in the quarter. So the question was what drove the positive variance and then secondly, and more forward looking we've got some different things happening.
By segment and the outlook, where semi is declining for cyclical reasons, but I think we all understand.
But I suspect that would have.
Pressure on semi gross margins on the volume side is there anything that we need to be aware of positive or negative with life Sciences gross margins as we think about the gives and takes quarter on quarter and then as it relates to operating expense I think weve expected that there would be some rightsizing and semi after the cryo sale and in are we starting to see that and if so to what magnitude and if not when would we start to see that impact with this thank you.
Okay, Hey, Craig stay on the line with us because I'm going to do the best I can on that string of questions and but I'd like you to depress me if I don't get to at all.
So on.
Yes in the in the operating expense.
Results that you've seen we had some improvement.
From some modest reductions.
But we also had some reduction of variable compensation expenses from.
Q2 to Q3.
And then in saying that.
We've also.
Had some rationalization of of integration so I will.
I will highlight that.
On that path of progress, while we realized some reductions I wouldn't say that we've had the heaviest upper yet to off load. Some of the stranded cost that you and I would think of in terms of selling to the cryo business. We have put something some actions in place and yielded some but we'll have more to do there and that's both in the cost base line as well as the SGN a line going forward, we'll we'll provide a more fulsome update at the.
At the Investor day.
But.
So let me pause and in.
Help me fill in the blanks with the rest of your question.
Yeah, I think that really addresses that on the operating expense side, but then the other part of the question was really gross margin. Some gives and takes as we think about.
The fiscal fourth quarter.
Yeah.
Well.
In the fourth quarter, we do see.
A little softer margin in semi but we see some improvement overall in life science now in the life science margin I'm not counting on.
Improvement in the.
In the baseline of sample management store systems, we do see a modest mix impact there that will help us modestly but.
But but more so the mix toward.
The margin and margin of gene, which will help us a bit.
So overall, we're seeing.
Relatively stable gross margins overall.
For the business and our forecast.
And.
And that's going to.
Yes that will settle.
Have an impact on us as we see just a little softer revenue.
Great. Thank you very much.
Up next we have John Pitzer, you May now proceed.
Yeah. Good afternoon, guys. Thanks, when we ask the questions. The first one on the semi side.
Makes a lot of sense that foundry is coming in better I'm just kind of curious your view on memory. If you could remind us again kind of in the semi business. Your split between memory Slash foundry logic and as you look at memory business trends the September quarter near mine kind of represent a bottom customers through the inventory burn.
Customers bookings levels aren't going lower or how do we think about memory trending from here.
Yes, John I'll take a stab at it we do the best we can on this we generally know from OEM tool standpoint, the type of.
The type of tool, but we don't have a 100% precision if its memory or logic, but we do know that the drivers lately.
I have been for the drivers of the uptick event for foundry.
And some logic, so that that part we feel pretty comfortable about.
On the contamination control solutions were pretty clear so that's a very low level of memory.
But one thing I will tell you is of the.
60, plus customers that we have.
In the.
The Ccs business, nine or foundry 10 or memory.
And although they don't buy the same quantities of tools, we know that when memory picks up we'll start to see it. So we'll get a feel for that we'll start to see it. So I would guess that at the low levels, where we are this.
This ought to be somewhere near a bottom, but I wouldn't I'd be hard pressed to tell you when we think that might pick up.
That's helpful and then guys on the life science side.
As you go through for perhaps lack of a better terms than some of the the growing pains here I. Appreciate that you don't want to put a timeline on kind of some of the corrective measures, but but are we talking sort of quarter quarter and a half multiple quarters. How do we think about kind of time to resolution on some of the logistical issues.
So for sure we want to be able to demonstrate some won't be able to demonstrate some improvements here within a couple of quarters. So I would I would imagine that.
By the December quarter, we'd be able to demonstrate results that show that were that were making significant improvements I remind you that it's just it's not the growth rates. We had anticipated we did 5% organic year over year growth, but our expectations backlog capability capacity or for higher than that and we will it's going to take us a couple of quarters, but it's not going to take us a year to be making improvements here that you can see.
And as the improvements we've been to materialize in the topline how do we think about kind of the operating margin leverage in this business.
And.
On the leverage side of life Sciences, it's probably good take you back to the leverage you're seeing it in this quarter. So 7% was up a point.
Were up 3%.
And.
Which was roughly about two two plus million dollars quarter to quarter. So.
We do see that kind of leverage occurring as we go through.
A piece of that was gross margin improvement of US seven tenths of a point driven on the gene was site, but again, that's because we are utilizing that fixed cost base was services personnel being fully utilized. So we think that we will continue to see that type of leverage.
As we move forward and as I highlighted John .
Sample management as it.
Turns back toward and stable and expansion, we'll see leverage on that side as well.
So.
While we're sitting at 7% today.
We see continued progress in improving operating margins even in the.
Fourth fiscal quarter.
Perfect. Thanks, guys appreciate it.
Thanks, Sean.
All right we have a follow up question from light up Paul Knight You May proceed.
Hi, Paul.
Hey, Steve can you talk about how much the backlog in life science grew year over year and inland secondly, how big is the stores business.
So I'll give us one second on the on the backlog or.
We're taking a look in and pull the stores business on an annual basis kind of running around a $30 million.
Run rate.
Got it.
So.
Paul we highlighted a build roughly of $20 million in the remarks, and they just confirm nuts in other trade at what im seeing year over year basis.
In the in Iowa, I got him say Thats a sample management.
Metric so we don't.
Identifier truck backlog in.
Gene was as highly transactional.
So clearly we finished the quarter with orders on the books for gene was but but we're not tracking that backlog the same so.
It it seems like it has built in is increased.
Which gives us encouragement obviously the challenge for us is to drop it to the bottom line for revenue growth.
Would it be fair to say that double digit backlog on life science or no.
On on a growth basis year over year.
Yes.
Yes.
Let me just make sure that.
I guess I'm not going to declare its double digit growth on total there's going to be double digit growth in elements of.
The the life Sciences backlog, but.
But a but I can't say that in total and the total it's not quite.
Double digit it went from about 265 to 275 range.
Okay, I'm sorry 60.
265 to 80 range sorry.
Okay. Thanks.
Yes.
Alright, there appears to be no further questions in the queue, we'll turn the call back over to you.
Alright, I appreciate and.
Everyone. Thank you for joining the call we know that Theres some intensity here on the sample management business lobby.
Kind of wrap up.
Highlight.
We had.
About 55% of our business here in the semi business significantly outperformed the market.
On a.
Year to date basis, it's quite remarkable this has been the first quarter decline in many quarters for us on the semi side.
And just down 5% off of the peak last year in the gene was business well.
It's a new addition, it's got the momentum of quarter to quarter up 13%. It's set records in each of the platform that they are.
Rolling out and that service for many years and in the sample management, while we have a keen focus on it it's got a 5% organic growth year over year and as I said the estimate for the year is about 7% organic growth. It's below our expectations tension is on we're going to fix it.
The.
The interest that you all show as both encouraging to US and also reminds of the responsibility to deliver these results. So we look at this guidance and we have confidence in it we are very straightforward with you and we appreciate the interest more importantly.
We're excited about change in the portfolio reset of the balance sheet to continue to make certain investments as we.
Moving forward and we look forward to the Investor day, where we will lay out this.
In a more.
Complete comprehensive picture you get to talk with our general management, So pleased to join us.
And we really appreciate your.
Attention and your time today. So thank you and we look forward to seeing you at Investor Day.
And ladies and gentlemen that will conclude the conference call for today. We thank you very much for your participation and you may now disconnect. Thank you.