Welcome to the Brooks Automation Q1 Fiscal Year 2014 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, February 6, 2014. I would now like to turn the conference over to Steve Schwartz, Chief Executive Officer. Please go ahead.

Thank you, and good afternoon, everyone. This is Lindon Robertson, the Executive Vice President and CFO for Brooks. I'd like to welcome each of you to the first quarter financial results conference call of Brooks fiscal 2014 year. We will be covering the results of the first quarter ended on December 31, and we'll provide an outlook into the second fiscal quarter ending March 31, 2014. The press release was issued after the close of the market today and is available at the Investor Relations page of our website, www.brooks.com, as are the illustrative PowerPoint slides that will be used during the prepared comments during today's call. I would like to remind everybody 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 in the aforementioned PowerPoint presentation on our website and our various filings with the SEC, including the Form 10-Q for the first quarter ended December 31, 2013. We make no obligation to update these statements, should future financial data or events occur that differ from 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 too 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 the GAAP financial results and the reconciliations of GAAP measures, provide a more complete understanding of the Brooks business. Non-GAAP measures should not be relied upon to the exclusion of the GAAP measures. On the call with me today is Brooks' Chief Executive Officer, Steve Schwartz. We will open with his remarks on the business environment and our first quarter highlights. Then we will provide an overview of the first quarter financial results and a summary of our financial outlook for the quarter ending March 31, which is our second quarter of fiscal 2014. We will then take your questions. During the prepared remarks, we will from time to time make reference to the slides available to everyone, again, on the Investor Relations page of the Brooks website. So with that, I'll turn the call over to Steve.

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 first quarter of our 2014 fiscal year. In the December quarter we continued to build on the strong momentum we generated over the 4 quarters of fiscal 2013, with another sequential increase in quarterly revenue and gross margin, a nice uptick in bookings and achievement of some significant market position milestones that continue to set us up well for 2014 and beyond. Like other suppliers to the front-end semiconductor capital equipment space, we experienced significant revenue growth in that portion of our business. And we too are positive about the outlook for 2014. Our Life Sciences business gained in market position and profitability and our Brooks Global Services business continued to show steady improvement and stability, which is a hallmark of this important franchise. Before I get into specific elements of what drove our business in the quarter, I'd like to give some color on what is the sum of many moving parts. On our call last quarter, we gave some specifics as to how we saw our December revenue breaking out in our BPS segment. We anticipated quarter-on-quarter revenue growth in the Semiconductor Front End business somewhere in the range of up 10% to 20%. We contemplated a second consecutive quarter of double-digit percentage dip in our backend revenue. And we estimated that revenue from our Industrial products would be down by approximately 40%. To summarize what we experienced in the December quarter, our Semi Front End business actually increased by 21% from September. Our backend business was indeed down by double-digit percentage and a seasonal 34% decrease in the Polycold product demand for tablets and smartphone displays, caused our Industrial market segment to…

I refer once again to the PowerPoint slides available on our website. Turning to the Slide 3, the first quarter results reflect topline growth of 5% sequentially, which is also an increase of 27% compared to the first quarter of 2013. Gross margin expanded for the third consecutive quarter reflecting further benefits from operational improvements and our continued shift to the portfolio towards higher margin offerings. R&D spend in the quarter was $13.2 million, similar to our fourth quarter of fiscal 2013. Investments here drive continued design wins in the Semiconductor Front End and adjacent spaces as well as our Life Sciences Systems initiatives. SG&A in the quarter increased to $25.3 million compared to $24.5 million in the fourth quarter of fiscal 2013. The increase was driven by restoring the normal accrual for performance-based compensation, which was significantly reduced in 2013. As Slide number 4 shows GAAP net income for the first quarter of fiscal 2014 was $3.4 million or $0.05 per diluted share. While operating profits increased, this page shows the other items, which resulted in the sequential drop in earnings per share for the quarter, most of which were anticipated in our prior guidance. Special charges of $1.4 million include restructuring, an impairment of intangibles and cost associated with recently completed acquisitions. GAAP taxes came in at a more normal 33% rate for the first quarter compared to the significant benefit we recognized in the previous quarter. And joint venture income came in lower than the fourth quarter, both of these, which were just as anticipated. On the non-GAAP measure, our adjusted net income was $6.1 million or that $0.09 per diluted share as you see on the chart. Turning to Slide 5. EBITDA was $14.8 million or $1.4 million higher than the fourth quarter, driving operating cash…

[Operator Instructions] And our first question comes from the line of Edwin Mok with Needham and Company.

So first question I have on the guidance, just kind of wanted to get some color. How much of that is going to be coming from semi versus other part of your business? Is it all front-end semi or any additional color you can provide regarding Life Science or just service revenue?

To our best estimate, the uptick in the front-end semi, we estimate somewhere in the 5% to 10% range up for Q2. We see the adjacent space going down again, so that gives most of the color here.

Do you expect that trend to continue into the second quarter -- or sorry, calendar's end quarter and beyond?

Again, we're hopeful, but we go based on what our customers say. So we remain positive based on their commentary, but we don't have better visibility than that right now.

I noticed that your operating profit for your Brooks Products group has actually come down a little bit. Has that all just come from that write-down that you mentioned on the call, reduction of gross margin.

Yes. So in the first quarter, Edwin, it only has about $200,000 of additional profit at the bottom line for Brooks Products Solutions. And as you noted that we have a little softer gross margin. You may recall on the previous call last quarter, we highlighted that we are very pleased with the margins, but we wanted the analyst to understand that a little bit of that came from some reserve adjustments because of the efficiencies in the business and that that would not repeat every quarter. So actually these gross margins came in very close to what we are anticipating and what we had indicated.

And then, I guess, one question on the Life Science area. On the Life Science, I think you guys talked about this breakeven point. As we know, the business has been kind of lumpy on that end, right? How do you kind of think about the market right now? Do you think that do you need to win a few big contracts for you to kind of get there, get to your breakeven point? Or do you think that the business is going to be kind of smaller deals where you have to win a lot more and kind of be a little bit broader? Any way you can kind of quantify or describe how the business is trending and how you think you can get to that breakeven point?

I think it's a very good question. This is an exciting part of our business. First, let me just kind of reiterate. We had a really terrific signings, booking of new orders this past quarter. And as we highlighted, we closed the quarter with $33 million in backlog. So we are very excited going in through the rest of the year. On the profit side, when you look forward to that December quarter in which we talked about getting to a breakeven point at $15 million or $16 million; we've got time here. One, with that backlog, I believe we have a lot of confidence at being at that revenue level, which would be a significant run rate above last year's revenue, right at $43 million, we'd be looking at a $60 million run rate when we leave this year. Secondly, on the breakeven, those margins at 45%, what we're looking for is continued cost improvement and some synergies from the expenses. So we think between some reductions and the cost of expense and that revenue, we'll get to that breakeven. So it could be at the 45%, it could be a little bit better margins that get us there.

Edwin, we also have that opportunity here to take advantage of benefits from absorption as we continue to add more revenue into that business infrastructure that we have. So we think that we're in a good position and in on track to continue to meet our commitments.

Our next question comes from the line of Jairam Nathan with Sidoti & Company.

Just wondering if you could spend a little more time on the adjacent markets. I know you're guiding for a weaker second quarter. And what really makes it turn in the second half? What are some of the things that you're looking for?

One of the things that we anticipate will pick up, we hope will pick up, will be some of the backend business. So the backend spend is a little bit down and we understand from the commentaries, we listen to our customers that they anticipate maybe the back half of the calendar year will start to be up, so that will be meaningful for us. We also talked on the Industrial side. We talked about the cyclicality we have observed that's seasonal in nature. And historically our Q1 and Q2 have been down, our Q3 and our Q4 have been up. And if the past years, if that pattern continues we would anticipate the seasonality that would bring the business back a little bit in our third and fourth fiscal quarter.

You know, you have in the past given, broken down your backend business revenues. Can you give us an idea what it was, just to kind of understand the magnitude in the December quarter?

Jairam, again, we don't wanted to be too specific, but we had the business up to a bit more than a $25 million run rate on the quarterly base and we're now beneath the $20 million run rate to give you a little bit of perspective.

And my other question was on gross margin. So as this front-end kind of strengthens and adjacent markets come down. How is that impacting gross margins? As adjacent markets improve, how should we expect gross margins to react?

In the Automation space, we're pretty pleased with our margins and our capability to service that space. So I don't anticipate that you're going to see a significant change in the margins. What we are excited about are some of those wins in the backend as that does develop. We have had a strategy of being, one, innovative in terms of the design wins we get and diversifying and making sure that we are focusing on the things that will impact our business positively. And as we've shared in the past, we've taken some of the products out of our portfolio that were less productive. So I think we're confident in both the front-end and the backend to help contribute to our margins.

Jairam, just one more thing, of the 10 design wins that we had this quarter, 4 were for new backend applications. So we continue to make investments in that business and as it grows we anticipate that it'll continue to drive good profitability for the company.

Our next question comes from the line of Patrick Ho with Stifel, Nicolaus.

Steve, you have talked about design wins in the past, and you mentioned 10 new ones this past quarter. Some of the applications or processes that you mentioned in the past have been drivers were like advanced packaging. I guess maybe a 2-part question on that is: one, what do you see in that marketplace; and 2, were some of the design wins, I guess, targeting that marketplace given the emergence of a lot of those processes?

As I mentioned just second ago, 4 of the 10 wins were for backend for some of these advanced packaging applications. I think the fact that we've been pretty aggressive about going after those and we have technologies that serve them particularly well, our ability to handle things that are different from a single-rigid silicon wafer has been a big benefit to us in a number of a markets. So we have been aggressive about it. And we have seen a lot more opportunities because of the relative new applications that are coming along. There are new competitors and people developing tools that haven't been in the marketplace before. So if we're first in, we seem to have pretty significant opportunities. So we do like that as a business and we also believe that it's going to be a good long-term grower here. We understand that things are down right now, but we believe in the long-term potential here.

Going to the Life Sciences side of things, you had a really strong orders quarter. And obviously, your visibility and your discussions with customers are probably improving as well. Is there a bias one way or the other between the SampleStore and the BioStore in terms of the new Twinbank solutions? Are you seeing one more than the other or is it kind of even on both of those fronts?

So Patrick, the SampleStore is typically for storage of chemical compounds at minus 20. And so you either need a BioStore or a SampleStore. The BioStores are typically for biological samples at minus 80. The compound store market is typically pharmaceutical companies and that's a business that grows steadily and it's pretty dependable. We're seeing acceleration on the bio side and some of the biological stores are for pharmaceutical companies who have biological stores. But most of them are for research institutions or people who are doing very specific work with biological samples. The modular nature of the product allows us to have built some pretty high capacity stores and so this design allows it to be configured if you will for people who need from a few 100,000 samples up to millions of samples. So it's a product that suits both bio and pharma for a number of different applications. I think that's what leading to one of the tremendous benefits of the architecture actually.

And then, final question in terms of the margin profile. You had a really good quarter in terms of the Life Sciences gross margins. But, generally, and I think, Steve, you noticed in the past, for the semi side of things, typically new products tend to have lower gross margins until they kind of get to the volume ramp. I guess what have you done differently on this new Twinbank product that's allowing you to get these really good margins, pretty much from the outset?

Patrick, I don't need to be flip, but to build more than one of the same product has been great. So one of the things we try to do is to really standardize on this architecture. So we really emphasize the architecture here. The companies that we acquire, the products that they developed, there was a lot of custom work there. And so I think we designed the product, so that we could indeed have lower cost structure. I think early indications are that we've been pretty successful there, so one of the reasons to drive this was, so that we could continue to leverage the investments that we've made, and sell products with mostly like bills-of-materials.

[Operator Instructions] Our next question comes from the line of Ben Pang with Northland Capital Markets.

First, on the Life Sciences business, is your overall growth rate expectation for the space the same now as it was a year ago? Has that changed at all?

No, Ben we still think it's about a 20% growth rate.

And then, I think you guys have also introduced some new software products though, correct?

We have.

Is that wider than, I guess, a little bit of a difference in the gross margin quarter-to-quarter? Does that have a bigger impact depending on how much of a percentage of shipment the software accounts for?

Actually, not this quarter, Ben. We didn't see a significant change in the amount of software content. What we do, though, you are sensitive to a mix point and we will remind everybody that we generally have about half of our business in the stores revenue. And then, generally the other half is between consumables and services. And I'm happy to say that we saw positive margins in actually have 3 pieces of this. And as Steve, pointed out what we did see as well is some good cost absorption. Everybody is busy right now in the Life Science business and as we've seen that business ramp, the backlog gives you a good indication of just how busy the factory floor is. And some of this business close immediately and some of it's long-term contracts with a lot of built structured to go out in the future period. So we have a lot of things underway and that's helping the absorption cost.

And then on the Brooks Products Solutions, the Semiconductor Front End side, if you look at the relative growth rate between the December quarter and March, is there impact from the Korean OEMs or is that across the board for all the OEMs?

Yes, that's pretty much across the board for all the OEMs.

And then, I think you mentioned in your opening comments that, I forgot the exact wording, but you guys are shipping more, I guess new products now on a relative basis. Your new products continue to gain traction. Does that have actually a negative margin impact kind of following on what Patrick commented on earlier in terms of some of these newer products having lower gross margins?

I understand that dynamic that was described, because often when you step into a new product in your first builds you face some cost hurdles. But actually I'm really pleased to talk about this because what Mark Morelli and the operations team has done here, has really started designing costs in as part of the development step. And so when we go into a design stage and we focus on the solutions and really the targets of where we want to win, we are looking for something that we can design cost into the product as well as replicate that product over multiple sales of that same product. So both allow us to continue to gain cost benefits going forward, but as we shed some of the less cost-effective products that we have been talking about over the past quarters and pick up these newly designed products, we're actually seeing that lift occur for us. So frankly, I would say, we've overcome that type of challenge that you're referring to and we're seeing benefits as we refresh our product line.

The final question for me is in terms of the packaging, the backend side of the business. Aren't you guys relatively more weighted to I guess the advanced packaging stuff? And at least it looks like the utilization rates, based on our checks, seem to be okay. Why is there I guess a reluctance in your view for the industry to spend on the advanced backend stuff or is your mix more broad in terms of backend applications?

You broke up a little bit. But I think you asked if we're more weighted toward the advanced packaging or broader mix. We've penetrated a pretty significant number now. So I would say, although, we don't have that kind of granularity broken out exactly, we have pretty broad mix across the backend.

Our next question comes from the line of John Pitzer with Credit Suisse.

This is Farhan asking a question on behalf of John. First question I have was on the Life Sciences' gross margin. You had a very impressive gross margin in the December quarter. And if I compare it like from a year ago, at a similar revenue level, you are almost like up 10 points. So one question I had was like in regards to March quarter, you mentioned like at similar revenue level, you would expect like gross margins to be about 45%. But then as I think about the second half of the year and going into next year, your revenue profile should be at a higher revenue level. So I just wanted to understand what should be the expectations for gross margin, as you ramp your revenue to higher level in Life Sciences?

I think it's a very fair question. But we'll continue to guide at this point to set the expectations around the 45%. And frankly, this indeed gets some benefits from volumes, but we also need to recognize that within the $12 million that we recognized this quarter, we have contracts of varying sizes, some of these vary to $1 million to $2 million apiece. And each contract will have a pricing equation. It can impact the margin in a given quarter. So the business, as we've described in the past, can be a little bit lumpy in the bookings as well as new revenue and the contracts that we work. So it depends a bit on the mix in the quarter. But fundamentally at the base of the business, we see traction on the new product platform that Steve described as being helpful to us. We see the increased volumes being helpful. And so we would expect that this business can do better than 45% in the future. But for now, we would say it's better for us to have the expectations of 45%, because we do expect there will be some quarters that we go back down to the 40% level, like we have in the past and some quarters we exceed that level.

My second question is regarding the comments that Steve mentioned on in regards to the change in strategy of focusing more on the Tier 1 customer. So I just want to understand like is there actually a change in strategy here? And how should we think about the OpEx? Like I mean if you are reducing your focus on the Tier 2, then should we expect like some decline in OpEx or is it more of like greater focus on Tier 1, and therefore we should expect like higher level of OpEx going forward?

So I think the issue here really is, I think our engagement with the Tier 1s is up significantly. And it's really a result of the spending that's been in place for a couple of years. It's something that we really had to earn the chance to get back in there. So the level at which we've been spending, it's just taking us time to make sure that we get in front of these things. And it I think the engagements that we have now are really consistent with that spend. So it won't change. It really ought not change up or down. I think we're going to keep going at this pace, because now with this kind of engagement, this sustained level of spend is going to be important, while we continue to penetrate. So I hope you can understand that part.

And my last question is in regards to Korea. You mentioned like the win with one particular Korean OEM, and if I recall correctly, on the last call, you had mentioned that in the first half of 2012 your revenues from Korean OEMs were like close to $10 million per quarter. And if I think about the spending pattern, Samsung had to spend like 50% of the CapEx in fourth quarter and there was a lot of spending there, Hynix as well, just based on the public commentary. So if I just think about it conceptually, I would imagine like the Korean OEM business should be very strong for you, and probably back to the levels that you had in first half of 2012. So if you can just help us understand, is the business back to that level or if it's not, then what's the reason it's not?

Farhan, it's almost exactly at those levels actually.

Mr. Schwartz, there are no further questions at this time. I'll turn the conference back to you.

Well, thank you, everyone, for your interest in Brooks. And we look forward to speaking with you when we report results from our second quarter. Thanks very much.

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