Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Q2 Fiscal Year 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, April 27, 2017. I would now like to turn the conference over to Lindon Robertson, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you, Dave, and good afternoon, everyone. I would like to welcome each of you to the second quarter financial results conference call for the Brooks fiscal year 2017. We will be covering the results of the second quarter ended on March 31, and then we'll provide an outlook for the third fiscal quarter ending June 30 of this year. A press release was issued after the close of the markets today and is available at our Investor Relations page of our website, www.brooks.com, as are the illustrated PowerPoint slides that will be used during the prepared comments during the call. I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor Statement, the Safe Harbor slide on the aforementioned PowerPoint presentation on our website and our various filings with the SEC including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We made no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. I would also like to note that we may make reference to a number of non-GAAP financial measures which are used in addition to, and in conjunction with, results presented in accordance with GAAP. We believe that these non-GAAP measures provide an additional way of viewing aspects of our operations and performance. But when considered with GAAP financial results and a reconciliation of GAAP measures, they provide an even more complete understanding of the Brooks business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves. On the call with me today is our Chief Executive Officer, Steve Schwartz. We will open with his remarks on the business environment and our second quarter highlights then we'll provide an overview of the second quarter financial results and a summary of our financial outlook for the quarter ended June 30, which is our third quarter of the fiscal year 2017. We will then take your questions at the end of those comments. Again, during our prepared remarks, we will, from time to time, make reference to the slides I mentioned available to everyone on the Investor Relations page of our Brooks website. With that, I would like to turn the call over now to our CEO, Steve Schwartz.

Thank you, Lindon. Good afternoon, everyone, and thank you for joining our call. We're pleased to have the opportunity to report the results of the second quarter of our fiscal year 2017. We had an outstanding March quarter. Revenue at $169 million was up 6% from December and up 25% over the prior year. Gross margins increased sequentially by more than 200 basis points to a 10-year high, resulting in non-GAAP earnings per share of $0.28. We delivered our seventh consecutive quarter of growth in Life Sciences and our semiconductor business continues to prove out the value of the portfolio that we've built which targets the highest growth, highest value opportunities for automation and vacuum applications. Our March quarter bookings surged to $220 million with strong performance from both Life Sciences and Semiconductor segments, giving us a great of confidence in our forecast for additional growth in June. Suffice it to say, we're leading in 2 of the fastest-growing segments of 2 strong markets. And although these are really good days, we're still making investments in new product development and acquisitions and we're implementing a strategic roadmap that leads us to believe that our best performance is yet to come. I'll begin my comments with a recap of our Life Sciences business performance. We delivered another solid Life Sciences quarter and we're pleased with the relative predictability and rapid growth trajectory of this business. Revenue at $35 million was up 31% from the March quarter 1 year ago and 4% sequentially from December. Additionally, we followed December's $64 million of bookings with another strong quarter of $48 million booked, bringing our first half total to $112 million in orders. That's up more than 40% from the same period 1 year ago and already above the $108 million of revenue that…

Thank you, Steve. Please refer now to the PowerPoint slides available on the Brooks website under our Investor Relations tab. To start the remarks, I would like to draw your attention to Slide 3, which is a consolidated view of our operating performance. Our top line revenue increased 6% sequentially to $169 million. The growth was supported by 6% expansion in semiconductor solutions and 4% in Life Sciences, and our GAAP results on the left, operating income improved 12% to $15 million in the second quarter. This improvement was partially offset in the lines below operating income primarily due to a $1.8 million gain in the prior period which we recognized as other income as a result of closing the BioCision equity investment. We sustained GAAP EPS of $0.20 per share this quarter through the improved operating income in this period. Looking at the non-GAAP picture on the right side of the chart, adjusted earnings per share was $0.28, an increase of 14%. The top line growth certainly helped that non-GAAP gross margins increased 270 basis points to 39%. You'll see in the coming pages that the margin improvement was well supported by both segments. The SG&A increase of $4.6 million was primarily driven by an increase in accruals for higher performance based compensation and some outside consulting expense. This brings us to operating income of $21 million, a 15% increase from Q1. In the joint venture line, you can see we continue to benefit from our income in our Japan UCI joint venture which serves the OLED market with cryogenic pump products. All in, at the bottom line, we produced $19.8 million of non-GAAP net income or the $0.28 per share. If I take you back to Q2 of 2016 for a moment, when we launched our transformative restructuring…

Thank you very much sir. [Operator Instructions] And our first question comes from the line of Patrick Ho with Stifel. Your line is open.

Steve, maybe first on the semiconductor side of things. Given your traditionally short lead time for many of your automation products, what have you done with the supply chain to one, meet the demands of your customers? And two, it looks like it's obviously been a contributor to the really strong gross margins you just posted.

Yes. Thanks, Patrick. We spend a lot of time with the supply chain obviously. And actually in anticipation of the ramp, about 6 months ago, we really -- in earnest, we got the suppliers ready. So I think we've had a really good partnership with our suppliers. And as you mentioned, the cost reduction activity's been ongoing. So that's been one plus. The thing I want to put out there also, Patrick, is we had a pretty big bookings quarter and, as I mentioned, up 70% in semi. A little bit of that we anticipate is customers also starting to get ready for the quarter beyond June, for the September quarter. So normally, we'd be pressed to have that kind of ramp in a quarter, but what we're seeing is customers asking for deliveries to really secure positions out in the September quarter. So that's a positive for us. It feels like a comfortable position for us and we think our supply base is ready.

So great. So let me just make it clear. So you're also seeing some extended visibility versus the traditional three months that you typically get?

Yes, and I want to tell you this extended visibility, I think it's more our customers just making sure that they're making the commitments to us so that our suppliers will be ready. So indeed, we're building a little bit more backlog in an out quarter compared to anything that we've done over the past couple of years.

Great. And my follow-up question on the Life Sciences, and it looks like a lot of things are starting to click across your many different product lines. But the one you talked about last year at your Analyst Day that, that was a little slow to get going was the BioStore III product. Could you just give us a little bit of an update how, I guess, the sales traction and the customer adoption of that product and where it stands today?

Yes. So Patrick, I think the footprint's expanding, which is good. The application here is really around cells and cell therapy. And so necessarily this is going to take a little bit longer. So when we're -- it's something we're learning about, but as customers are beginning to take this, the test cycle will be long, so we're really encouraged by the customers who've begun to take the product. These are exactly who they should be from a target standpoint. But in terms of the larger numbers of systems, it's going to take a little while. But the sales teams engaged, the customers are engaged and to have commitments for 20 units, and 10 customers is a really good place for us to be right now. But indeed, this is slower than we'd anticipated from a ramp standpoint, but the traction feels like the right kind of traction and really strong, but we are behind but we remain really encouraged by the opportunity in the business.

Our next question comes from the line of Paul Knight with Janney. Your line is open.

This is actually Bill on for Paul. So first if we could, just at a high level, on the Life Science side of the business, could you give us a sense of the number of samples that you're storing onsite with freezers versus off site at BioStorage? And maybe just bigger picture, how you see the market evolving over the next couple of years? Do you see customers shifting more to onsite or off site? Just what dynamics you're seeing there?

So Bill, we haven't disclosed the breakout, but we have shared in the past some metrics that would give you a good estimate that we're in the range of 15 million plus samples in total being managed by BioStorage. What we have seen is there is a nice trend happening where customers are turning, as Steve's described, for a complete solution. And that complete solution has had customers turn to us to take samples on their location, in some cases, manage them on location and, in some cases, take them initially there and then transition them into our sites. So I think predominantly, they're looking for us to end up with them on our sites, but there are still some places that they would like to keep them close to them but to have professionals handling them 24/7 with the rigor that we apply to it. But there is an opening trend with both of those. I would still say there's some predominance to take them off-site and preserve their assets and their capital to be used for their research and returns.

And Bill, one thing that we're seeing because we have -- because we're in the stores and the storage business is that as we're managing samples at our customer site, we can clearly understand which ones maybe haven't been utilized in a long period of time and ought to be archived to free up space in the local store. So this is one of the benefits that we're able to provide the customers. So in the long run, rather than somebody adding a store, we have an opportunity for them to add the storage services. And so that's an impact on the large stores, but for us, it's a plus.

Got it. And then my follow up, sticking within the Life Sciences, can you just maybe talk about what you're seeing in terms of the bundling of your products? Has that helped with the traction with the B3C? And then maybe just how has that -- sorry, I lost my train of thought.

I'll take it from there because I think I might have an idea where you're going. When we've sold the BC3 [B3C] products, most of those actually have been with our consumables, and in some instances -- we have two customers during the last two quarters who purchased across the entire product portfolio that we have, so large stores, the BioStore III cryo, consumables and services as part of an entire sample management package. So indeed, there is a tremendous benefit here and we're starting to see it. And we see it particularly in larger customers for larger contracts who want us to manage or be a part of managing their entire sample inventory at all temperatures.

Got it. And one follow up I meant to add was have you maybe started to see some inbound inquiries as opposed to outbound sales initiatives to generate some of these leads, just any opportunity where you've gotten traction in one part of a company and now you're getting access to multiple teams?

We have. If we put salespeople at every single lead, we'd need a few more hundred people, but we're , I think that pipeline is really strong. And I think our team's ability to manage the inbounds has been, we're learning every quarter. So I think the team's doing a great job managing the inbound and there have been a lot of really good leads associated with the opportunities for B3C.

And our next question comes from the line of Edwin Mok with Needham. Please go ahead.

Since we're on Life Science, I want to ask you guys a question about the booking. I saw it down a little bit, but can you maybe provide some breakdown in terms of how your bookings are between system, consumable and BioStorage? And I've some follow-up on that.

It's an interesting perspective that they're down, we had $64 million in the prior quarter which was double our revenue last quarter. And now it's, we're right at the revenue level this quarter. So we're pretty pleased. These bookings come in on the system side, a little lumpy, as you always know. And on the BioStorage side, it's been on some significant negotiation with large customers coming in. So Edwin, we're not in the mode of breaking it out in detail, but the majority of these bookings, they come through the BioStorage side, more so than the legacy side, and I think I'll leave it at that. But it's going to move up and down over time. I will tell you that between these bookings of $40 million, $48 million and the $64 million last quarter, that's pretty healthy headroom above the revenue that we've shown both quarters and year-to-date.

And we did break it out last quarter for you because it was right down the middle 50-50 between BioStorage and the stores that we had a really big, a large store booking last quarter. I think we made reference to that very specifically.

Okay. Actually, that's helpful. I don't mean to complain about a booking, I mean you guys know well about one-to-one book-to-bill. Maybe, give us some color on that delay a bit of the samples. I think you talked about, Steve, about how that had actually some had limited growth so far. And even you can quantified it and you said that will start to come back. Is that -- should we expect some maybe more than normal pickup in revenue growth over the next 2 quarters as those catch up? Or how do you kind of think about that?

Yes, Patrick -- Edwin. So on this one, it's, we negotiate these contracts over a long period of time that customers get comfortable. We signed a master service agreement, and then we begin to realize the samples. And so sometimes the contract has been under discussion for a year, and we estimate when we think the samples are coming in. And I think on these 2 contracts, we had been working on them for quite a while and we just anticipated the samples would've come in a little bit earlier. Sometimes it takes a while for them to get the patients in the studies ramped up and some that we're going to learn a bit more and we don't have too much control over. But when we take the order, we begin to book the business in anticipation of receiving the samples. If the contract pushes a quarter or if the sample arrival is a little bit delayed, we'll try to get smarter about that. But the things that we had anticipated would happen, the contracts that we knew were coming are booking. The samples that are supposed to be part of the storage side will be part of the storage side. Just it's really a matter of arrival and getting it registered and timing. So we wish we'd been a little bit more crisp about that but I think we're really pleased that the business is coming as we'd anticipated. The business that we felt we would win, we have won. The nature of the contracts is exactly what we'd anticipated and just the timing of the samples does impact the revenue.

Okay, so what I want to ask is, are these normalizing in the June quarter? Or are you still, call it, behind what you anticipated in the June quarter?

As I mentioned, we estimate we're about -- so what we do in the June quarter is when we were together in June at the Analyst Day, what we're going to do in the June quarter is what we thought we'd be doing in the March quarter. It's about a one quarter lag.

I see. So okay. I mean that's actually very helpful. Just to give a perspective on how that had impacted you. Okay. And then I just have one question on the semi side. So margin expanded really nicely, and I think Lindon, you mentioned good cost reduction efforts obviously had helped, right? Just curious how much of that was cost reduction versus just comp basically that's in your model as it drives top line growth. And how do you think about margin as we go forward? Are these sustainable level? You think you have even more leverage and more margin expansion can come? Can you give us some color on that?

Yes, Edwin. Definitely our leverage point has improved. We have seen the cost reductions really do 2 things for our business, one, make us more efficient, not just in our cost but in our operation, speed of operation. We've consolidated our operations into our footprint, a smaller footprint. We've reduced some of the management layers a year ago. And I will say we have a lot of athletes on our team now that pass the ball very efficiently. So we're definitely seeing a better leverage point. In terms of this quarter, what you're also seeing is the strength of the portfolio. We have -- we hit a higher number on our contamination control. So when I refer to our gross margin traction, I often refer to it in three categories, the strength of the portfolio which includes the value of it. In other words, when we sell contamination control, it's above our average gross margin. When we sell our vacuum systems, they're highly valued in the advanced packaging spaces especially when we are supporting new applications. And so we're seeing a diversification not just in the products but also in the customer set and we're seeing strength in that portfolio. We're also seeing strength because of the cost reductions. And then finally, the size does matter, right? So we have leverage because of the revenue. In terms of this quarter, we saw cost improvements impact in the quarter if you compare this to last quarter. And it's a mix of warranty, reduction of related cost to inventory and other matters of that sort and then also the improvement of the repair centers. But the bulk of our improvement came through the value of our product portfolio and the size of the revenue.

[Operator Instructions] Our next question comes from the line of Amanda Scarnati with Citi. Your line is open.

Just continuing on the semiconductor side and the growth that you're seeing there, I know you mentioned that you're seeing some extended usage on the memory side, on the FOUP business. Can you just talk a little bit more about what your exposure is on memory and 3D NAND product? And how you see that growth continuing on throughout the year?

Sure. So Amanda, we had a pretty significant number of FOUP cleaning systems into the advanced foundry. So a lot of 10 nanometer expansion, 7 nanometer expansion and that served us particularly well and really helped us to grow the business especially over the last couple of quarters. There's a broader number of customers now who are representing the business. We have about 10 customers per quarter and they're across memory, a second tier foundry and of course leading edge companies as well. So we like the breadth in the number of customers, the amount of business. And we see the leading edge foundry capacity slowing right now, but we see the number of Tier 2 foundries expanding, the number of memory customers expanding. So that will sustain the business as we go forward. Of course, anything from 3D NAND memory standpoint drives the vacuum automation business, so it drives the vacuum robotics and the vacuum systems. So those are always really strong drivers for us. So we switch from a high content vacuum automation from the memory fabs or the contamination control and, of course, some vacuum for dep and etch in the foundry, but the mix for products for us is different. As the dep etch content in a memory fab is higher, the FOUP cleaning content in a foundry is higher for us.

And then just another question on the gross margins in the Life Sciences business. Those were up quite a bit this quarter. You mentioned that it was expected that they would go up because of the lower genomic business. Do you see that 40% gross margin as something that's attainable longer term? Or is something in that 36% range a little bit more reasonable to model going forward?

No. We see the 40% as being our normal going forward. When you get out to the December quarter, we'll give probably some specific guidance on that quarter as we approach it to see what the mix might do to us again on that seasonality. But all the rest accords and in total on average, we think we'll be at the 40% level.

And our next question comes from the line of Farhan Ahmad with Crédit Suisse. Your line is open.

Can you just provide some sort of outlook, not just in the actions we took over the course of the past year and the mix benefits. But as we had finalized our Jena reduction of our repair center, we saw improvement in our cost quarter-to-quarter both in the repair areas, and also we saw some warranty improvement cost delivery in our product area. So it's a mix, but I'll estimate that we had probably close to $1 million of cost reduction impact in the quarter provide some sort of outlook for second half of calendar year both in the Life Sciences and the semi? As much as you see, what do you expect for the business?

Yes, Farhan, we love to be accurate. Let me tell you what we're feeling right now. How about that? The Life Sciences, we see continued growth. So as we build backlog and we continue to look at the order pipeline and the opportunities. And as Lindon mentioned, because it's such a significant part of the recurring revenue that as we build that backlog, we'll recognize revenue for those products. So we continue to see growth in the Life Sciences business. I think at the beginning of the year, we'd anticipated we'd be close to $160 million in revenue. It looks like we'll come in somewhere in the range of 150 more likely but still strong growth for the business for June, for September, for December. On the semi side, we're feeling the momentum that people continue to talk about for the expansion. And in the memory business, of course, as you know, we don't have much visibility there. But as I mentioned, we have pretty strong bookings. And unusually, it's something we haven't seen for many years, the backlog is starting to build a little bit more in the second quarter out, so for the September quarter, more than we've seen in the past year. So we have the feeling that the business will be strong. There are customers continue to make sure that we're going to be ready as a supplier and we're doing the same things with our supply base. And for example, when we go to a supplier who also provides components to our competitors or to equipment makers, we see them ramping not just for us but for everybody else. So I think the sentiment is that it will still be a healthy second half but we really can't quantify other than what we anticipate for June right now.

And then just one big picture question. Like if I look at your operating margins long term, in late 2010, early 2011, you were running at about, call it, 12% to 14% operating margin. And, but then for a period of like a 5-year period, your average operating margin on a quarterly basis was like about 4%. So the question I have is, is there anything that, in terms of the margin sustainability, how do you feel about that going forward? Could you sustain this level? Or do you feel that there is some risk that the margins will drop off from here?

Yes, Farhan. Our operating margin, the health of it is more sustainable now than I think it's ever been. We have 2 things, as I've referenced earlier in the call, that we had significant fixed cost reduction. And we also now have, and this is really important and I think many people in the Life Sciences side of the equation understand this, but we now have a much more sustainable business equation to be resilient in the cycles. When I say this, for example, we have a recurring revenue stream now still 60% of our plus 60% plus of our revenue in Life Sciences is recurring. And every quarter it has stepped up since we acquired the BioStorage business and that gives us much more resiliency and stability. Now in the operating margin level, we set a target. When you ask if it's sustainable, not only do we think it's sustainable but we think we can continue to improve upon it, and we think that we'll have in our operating margins up in the 15% to 18% level by 2019. It'll vary based on cycles in the semi, but our breakeven point, I will estimate that we probably dropped. We've added about 15 million of resiliency in terms of revenue drops on the semi side, that being if you went back three, four years ago, we probably needed 85 million to 95 million of revenue on the semi side for breakeven point. Now I think we're down in that 75 million range on the semi side to be able to sustain breakeven with the resiliency of our cost model, combined with the resiliency of the recurring revenue stream and growth of the Life Science business. And that's been our strategy and our focus and I think it's creating health and that's why we say there's an inherent strength there.

And gentlemen, there are no further questions at present time. Mr. Robertson, I'll turn the call back to yourself.

Thank you, Dave, and thank you, everyone, for tuning in with us. We know it's a very busy time for you and it's an exciting time in the markets. And we'll just reinforce that the Brooks team is really energized here. These are great results and a good outlook for us and we're going to keep our heads down and focused, and I look forward to seeing you next quarter.

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