Hello, everyone, and thank you for standing by, and welcome to the Brooks Automation Q3 2019 Financial Results. [Operator Instructions] Now a quick reminder, today's call is being recorded. It's August 1, 2019. 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 would like to welcome you to our third quarter earnings conference call for Brooks for fiscal 2019 ended June 30th. Our earnings press release was issued after the close of the market today, and is available on our Investor Relations website, located at www.brooks.com, as are our supplementary PowerPoint slides that we'll 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 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 to you to the sections of our earnings release entitled Safe Harbor Statement, the Safe Harbor slide on our information PowerPoint presentation on our website, and our various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements, should future financial data or events occur that differ from 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, but when considered with GAAP financial results and the 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, Lindon Robertson. We will open the call with remarks from Steve on our business strategy and the highlights of the third quarter. Then Lindon 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 30th. We will then take your questions at the end of the prepared remarks. Before turning the call over to Steve, I would like to remind everyone that 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're 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 the 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 GENEWIZ and organic 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 reemphasize 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 subsectors, each with their own unique growth characteristics. This portfolio allows more dependable growth, even with variability in each subsector, 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 a $37 million contribution from GENEWIZ and 5% organic growth from Sample Management. We remain particularly pleased with the execution of GENEWIZ, which is on a trajectory for 20% growth this year. In the quarter, GENEWIZ delivered record revenue from each…

Thank you, Steve. I now draw your attention to Slide 3 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 a 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 1st, 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 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 GENEWIZ 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 in customer relationships, with a continuous focus on the pipeline of potential acquisitions. Let's move on to Slide 4 to see 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…

[Operator Instructions] Okay, first question coming from the line of Craig Ellis [B.Riley, FBR].

Thanks for taking the questions, and congratulations on closing the sale and cleaning up the balance sheet, guys. 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 reset in growth expectations, is that really impacting the systems business or the services business, or both of those businesses?

Yes, so Craig, it's actually impacting both of the businesses. The systems business was down, and the Sample Management portion of the business, the storage portion of the business, although still growing, was slower than we experienced over the last couple of quarters.

And, Steve, what is it that you're looking at as you make changes to that business to close the gap back before you think the business's growth should be, relative to industry group. What are some milestones that we can look at over the coming quarters that will help us see that that's getting back on the proper growth trajectory?

Yes, so Craig, a couple things. One, we need to -- as you're aware, we need to continue to manage the dependability of the stores business. This is something that ought to be a little bit more in our control. You know, we did have some impact of ability to get some systems booked to be able to recognize revenue, but still, the drop is bigger than the causes 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 say on track delivering the tools, the -- to the customers on time? So that's one that's really operational issues for us to manage. And in the Sample Management, again, we think the bookings and the order patterns are still strong. The variability in that business comes from things that are associated with alliance on the genomics side of that business, the non-GENEWIZ stuff, the things that we run for Rutgers, and our ability to get samples registered and manage the ins and outs of the customer requests on that business. So that, for us, feels 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. It's the peripheral portions of that that are different from the bio-storage 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 having as robust a 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 and continue to register them, over the long term, that will be a good, steady growth business for us.

Thank you. [Operator Instructions] Next question coming from Paul Knight [Janney Montgomery].

Hey, Steve, how big is an automated store system shipment, one project?

On a big sample store, it's roughly a $1 million tool, if you will, and on a BioStore III Cryo, it's a $100,000 to $150,000 kind of tool.

And can you give us a little history? Is it the automated store system that's the biggest problem, or can you talk to that?

Paul, let me add in, so in a typical shipment, it may be a single store that would be $1 million, but it's not unusual for us to have a -- call it a $1 million to $3 million project with a customer, where it might be an extra-long store, or it might be multiple stores on the large side. We're still handling the smaller B3 cryos more in single and sometimes, you know, shipping two or three at a time, but those aren't the challenge. The bigger -- the challenge is 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 had inventory in hand and that we were starting to tune it toward 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 achieve it in the quarter. We had competence of getting it, but we didn't get it. And we've had project delays relative to customer sites, and installation costs were impacted as a result of that. So the issues compound themselves a bit. We see a path to work and improve our way out of this. And when I say that, we recognize we've said that for a couple of times over the past year, and so we're going to be a little more conservative in calling it. But I would emphasize these are significant opportunities that continue to come to us. We have, you know, a good pipeline of opportunities that we're working currently, really good opportunities, and it's expanded. Sometimes we have more opportunity in Europe than in the U.S., and sometimes it's the other way around, and in the past year it's increased in China as well. So we're encouraged on the breadth of the opportunity continuing to expand, but we've got to get better at the execution.

Next question coming up from the line of Amanda Scarnati [Citibank].

On the Semiconductor side, we've been hearing from a couple of players in this space that the logic and foundry business is becoming a little bit more too half-weighted this year and seeing a little bit more strength there. So could you just talk a little bit about what you're seeing in the sector and how that plays in to your guidance for down 5% to 10% in the September quarter, with growth in the December quarter?

Sure. As you said, and as everybody has started to give indications, logic and foundry feel like a second-half pickup. And as I mentioned, we have some Vacuum Robot pickup. The decrease for us in the quarter is likely related to some of the Tier 2 foundry, and 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's a pause there, but we still continue to see strength in Contamination Control, in Advanced Packaging, and as I mentioned, a slight pickup in Vacuum Robots for the second consecutive quarter. But on the Systems business, particularly related to China, we're 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 requests for really significant deliveries in the December quarter.

And then, I think you also mentioned that with CCS business, that you might pull 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, and in addition to today's guidance?

Yes, our best estimates are factored in right now into what the September and December quarters look like.

Okay. And then, the last question I just have, if I can, is on the margin expansion in the Life Sciences business and what seems to be somewhat reasonable in that market. I know the Street, and myself included, are modeling quite substantial pickup in margins in that business and haven't really seen it yet. So if you could just talk a little bit about the margin trajectory in that business.

Yes, Amanda, I'll talk about that, and of course it tends to be an aggregation of both Sample Management and GENEWIZ. What we both -- frankly, on the operating margin line, we do see the trajectory of the model to be quite comparable over the longer term. And when I say the longer term, we'll give more of an update on that for -- in our Investor Day. But as we see volatility, for example in Sample Management, it dropped down. And while we saw acceleration of 13% growth, we got nice leverage out of GENEWIZ 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 GENEWIZ contributing nicely. But if I move up to the gross margin, you know, I highlighted before GENEWIZ expected to range between 47% to 51%. We're at the high end of that range, and that has quite a bit to do with the period of investment and the utilization of that investment and whether we've -- utilizing it with a high percentage of capacity utilization. And 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 productive, and people productive, because we make resources in -- that are in place. Obviously, on the gross margin side of Sample Management, I 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've put in here is about the 40 -- I'm sorry, the 38% range. So, let me pause to see if I've addressed your question. If you want to ask more, feel free.

No, I think that's great. Thank you.

[Operator Instructions] Next question coming from the line of Patrick Ho [Stifel].

Steve, maybe just following up on some of your commentary about the softening with the Tier 2 players in China -- which sounds reasonable, given 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 starts to kind of grow? You've got major players already like AMEC, but what's your, I guess penetration, or what's your efforts there in getting into some of those companies?

Patrick, at last count we had 13 OEM companies in China that were customers of ours, so we see continued expansion. Whenever they win a new design, whenever they win an application, you know, we have a vacuum robot for sure, and in a lot of instances, we have a vacuum system. 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 that will be accepted by the FAB. So the breadth is really strong. The amount of design activity that we've dedicated to China over the past couple of years has been significant. And we see from a market share, market position standpoint, we're extremely strong in China, again, because newcomers can focus on their process technology and have a very dependable process tool when they ship it into a FAB . And it's especially important when it sits next to a tool from one of the Tier 1 OEMs. It just has to perform.

Great, that's helpful. And maybe moving to the Life Sciences side of things, on the sample management and some of the operational issues you mentioned in delivering the systems to customers, is this something that's supply chain related, procurement of parts, or is it more just I guess your own internal operations of putting the system together and then delivering it to a customer?

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 a couple of years ago, that was a pretty systemic issue for us, but we've managed that. A year ago, we managed through a redundant cost of moving some of that supply chain in house. What's hitting us right now is [indiscernible], and I think the manufacturing and supply chain team has demonstrated some improvements there. We got to those root issues, but it's more about the project management from the build to the install on getting projects completed. And some of that is managing the timing, coordination between us and customers. Some of it's getting shipments out. So while it's execution to get it out the door, I'd say probably two-thirds of the issue is at the customer delivery site. That's a significant part of the cost as you're setting up the system. You pack up the system, you ship it, and that's where the actual assembly takes place. I don't put it all at the feet of that customer site. So this is a management issue that 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 that management process, and it's got a lot of attention on it. So I think you're -- 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 haven't taken it into the guidance yet because we're not going to disappoint you again. So we're going to deliver on what we put 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, my final question, following up on those comments, Lindon, 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 know, you get to start pushing it past 40% to start. Is this a big component of it?

It's a portion, yes, but it's also the growth. So as we grow, we gain really good leverage on gross margin, and particularly operating margin. Where we are on the curve on operating margin is highly leverage-able. So we'll see gross margin come with growth in sample storage services, in particular in our indy sites and our related sites around that business, but also in the full utilization of resources and fixed costs around store systems. So, yes, project management is a little -- is a bit of the issue currently on making expectations on both delivering systems revenue, but also in the longer term, I'll get leverage out of gross margin and get us up to the 42-plus level, it will include the growth equation.

We have a follow-up question from the line of Craig Ellis.

Thanks for taking the follow-up question, and it's really a clarification and then a question. So the clarification, at least versus my models Lindon, 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 in the outlook where Semi's declining for cyclical reasons that 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 we've expected that there would be some right sizing in semi after the cryo sale, and are we starting to see that? And if so, to what magnitude, and if now, when would we start to see that impact the business? 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, but I'd like you to press me if I don't get to it all. 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 in saying that, we've also had some rationalization of integration. So I will highlight that on that path of progress, while we've realized some reductions, I wouldn't say that we've had the heaviest effort yet to offload some of the stranded costs that you and I would think of in terms of selling this cryo business. We have put 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 SG&A line going forward. We'll provide a more fulsome update at the Investor Day. So let me pause, and help me fill in the blanks with the rest of your question.

Yes, I think that really addresses it on the operating expense, Lindon. The other part of the question was really gross margins and gives and takes as we think about the fiscal fourth quarter.

Yes. 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 baseline of Sample Management store systems. We do see a modest mix impact there that will help us modestly. But more so, the mix toward the margin of GENEWIZ will help us a bit. So, overall, we're seeing relatively stable gross margins overall for the business and our forecast, and that's going to -- yes, that will have an impact on us, as we see just a little softer revenue.

Up next, we have John Pitzer [Credit Suisse].

Thanks for letting me ask the questions, the first one on the semi side. It makes a lot of sense that the foundry is coming in better. I'm just kind of curious your view on memory. If you can remind us again, kind of in the semi business, you're split between memory/foundry logic. And as you look at memory business trends, does September quarter in your mind kind of represent a bottom? Customers are 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 an OEM tool standpoint the type of tool, but we don't have 100% precision if it's memory or logic. But we do know that the drivers lately have been for -- the drivers of the uptick have been for foundry and some logic, so that part we feel pretty comfortable about. On the Contamination Control Solutions, we're 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 CCS business, 9 are foundry, 10 are 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, and we'll start to see it. So I would guess that at the low levels that we are, 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 term, some of the growing pains here, I appreciate that you don't want to put a timeline on kind of some of the corrective measures. But are we talking quarter, quarter and a half, multiple quarters? How do we think about kind of time to resolution on some of the logistical issues?

So, John, for sure, we want to be able to demonstrate some improvements here within a couple of quarters. So I would imagine that by the December quarter, we'd be able to demonstrate results that show that we're making significant improvements. I remind you that it's just -- it's not the growth rates we'd anticipated. We did 5% organic year-over-year growth, but our expectations, backlog, capability, capacity are for higher than that, and we -- 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 begin to materialize in the topline, how do we think about kind of the operating margin leverage in this business?

On the leverage side of Life Sciences, it's probably good to take you back to the leverage you're seeing in this quarter. So 7% was up a point. We're up 3%, which was roughly about $2 million plus quarter-to-quarter. So we do see that kind of leverage occurring as we go through. A piece of that was gross margin improvement, about seven-tenths of a point, driven on the GENEWIZ side. But, again, that's because we are utilizing that fixed cost base, with services personnel being fully utilized. So we think that we'll continue to see that type of leverage as we move forward, and as I highlighted, John, Sample Management, as it turns back toward a stable and [indiscernible] 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.

All right, we have a follow-up question from the line of Paul Knight.

Hey, Steve, didn't you talk about how much the backlog in Life Science grew year over year? And then last, secondly, how big is the stores business?

Paul, give us one second on the backlog. We're taking a look. And, Paul, the stores business on an annual basis is 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 I just confirmed that's right at what I'm seeing year-over-year basis. And I've got to emphasize, that's a Sample Management metric, so we don't identify or track the backlog in GENEWIZ, as it's highly transactional. So, clearly, we finished the quarter with the orders on the books for GENEWIZ, but we're not tracking the backlog the same. So it has built and has 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 a double-digit backlog on Life Science, or no?

On a growth basis, year over year?

Yes.

Yes. Let me just make sure. I guess I'm not going to declare it's double-digit growth on total. There's going to be double-digit growth in elements of the Life Sciences backlog, but I can't say that in total. In the total, it's not quite double-digit. It went from about a 265 to a 275 range.

Okay.

I'm sorry, 265 to a 280 range. Sorry.

All right, there appears to be no further questions in the queue. We'll turn the call back over to you.

All right, Operator, and everyone, thank you for joining the call. We know that there's some intensity here on the Sample Management business. Let me kind of wrap up the highlight. You know, we've had about 55% of our business here in the Semi business, basically outperform the market. On a year-to-date basis, it's quite remarkable. This has been the first quarter of decline in many quarters for us on the Semi side, and it's just down 5% off of the peak last year. In the GENEWIZ business, while it's a new addition, it's got the momentum, quarter to quarter up 13%. It set records in each of the platform that they are rolling out in that service for many years. And in the Sample Management, while we have a key 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; [indiscernible] we're going to fix it. The interest that you all show is both encouraging to us, and also reminds us 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 changing the portfolio. We said that the balance sheet to continue to make certain investments as we move forward, and we look forward to the Investor Day, where we'll lay out this in a more complete, comprehensive picture, and you get to talk with our general management, so please do 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.

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.