Azenta, Inc. (AZTA) Q3 2019 Earnings Report, Transcript and Summary

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 of its three major service lines, Sanger sequencing, next-generation sequencing, and gene synthesis, an 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 GENEWIZ business, as well as the ability of the company to expand quickly. Our GENEWIZ business is also set up for a good fourth quarter. We're 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, GENEWIZ is demonstrating exceptional growth and a 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 GENEWIZ. 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, yet 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 in converting these wins to revenue. We're keenly focused on directing 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, we'll guide to a similar pace of revenue growth and flattish gross margin profile. We don't accept these levels as satisfactory, but we do require systemic solutions before we can instill confidence in our forecasts. We remain enthusiastic and confident in the tremendous opportunity presented by this business. There's 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 and business capture could support, but operationally could not deliver, and we will fix this. Before I move to 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 B3C 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 that's required for high-value biological samples. In addition, we shipped our second unit of a fully automated single sample handling cryostorage system to a large pharmaceutical company in Europe. The driver here is the management of cells for cell and gene therapy development, the same driver that's the source for much of the growth opportunity in our GENEWIZ business. Revenue from the cryoproducts 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're beginning to see a higher level of repeat orders from existing customers, and we believe that we're nearing a tipping point for the adoption of our automated cryosample management solutions. Overall, we anticipate another growth quarter in Life Sciences. As I mentioned, we remain bullish, but we'll 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 counterintuitive 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 1 year ago, which was our peak. Overall year to date, we're 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 that's provided by our portfolio. Because of our position in Contamination Control Solutions and advanced packaging applications, two secular growth drivers, we've been guiding that we had confidence that we could outgrow the Semiconductor capital equipment market by 2 to 4 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 higher level of outperformance relative to the 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 1 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 2 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 percent year over year. Year to date, our $53 million in Advanced Packaging revenue is just shy of the $56 million we delivered in the entire fiscal year 2018. And we had another very solid quarter from our 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 a 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 upon 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'll mention 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 a 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 is the result of some of the trade restrictions that are impacting Chinese investments in the near future. That said, we forecast our Vacuum Robot business to increase again in the September quarter, meaningfully, the majority of the increases for Robots to Tier 1 OEM tools that will ship to logic and foundry applications. Shipments to Tier 1 OEM customers for memory will remain at lower 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're already at risk of selling out of capacity in the December quarter, we worked 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 we're 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 completes sale of the Semiconductor Cryogenics business unit. As you were aware, during the past few quarters, we were busy executing on two sizeable transactions, the sale of our Semiconductor Cryovacuum business, and the acquisition of GENEWIZ, but during this period, we did not stop exploring next target opportunities. The addition of GENEWIZ puts us decidedly into the science of genomics and dramatically increases not only the size of our available market, but also the size and 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 an when they become available. That concludes my formal remarks, and I'll now turn the call over to Lindon for more specifics about the quarter and our outlook for Q4.

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 significant growth driven by the addition of GENEWIZ, which we acquired in November, 5% organic growth in Sample Management, and a 5% decline in Semiconductor Solutions, which is still strong performance relative to our industry peers. Looking at our GAAP earnings, we are reporting $0.10 earnings per share on a total company basis. As a reminder, that sale of the Semiconductor Cryogenics business closed on July 1, the day after the third quarter finished, so the discontinued operations continued $0.09 to the total GAAP earnings. On a continuing operations basis, we had net earnings of $0.01 per diluted share, which is $0.05 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 you note a favorable health of $9 million this quarter in the sequential comparison, due to the debt extinguishment costs in the prior quarter. Offsetting this is an $8 million increase in the GAAP-based tax expense. The increased tax charges reflect a late regulation change in this quarter related to the transition toll tax under the Tax Reform Act. While this change drove additional expense of $4 million, it did not effect the cash taxes paid. This shift -- let's shift focus to the non-GAAP results on the right side to get a clearer view of our performance during the quarter. Non-GAAP gross margins for the quarter were at 42.4% for the company, an 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 the dynamics you see in the year-over-year comparison include the mix impact of adding GENEWIZ to the business, along with the performance improvements in Sample Management and in 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 disclosed previously, we have reduced debt by approximately 90% on July 1, following the closure of the divestiture, which will eliminate most of the interest expense. To wrap up on the non-GAAP P&L discussion, I highlight that the $0.20 earnings per share is a 16% improvement over the second quarter. While it is down $0.01 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 and profitability, with the [indiscernible] interest and the tax dynamics. Moving on to Slide 5, 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 GENEWIZ and the 5% organic growth in Sample Management. Overall, we remain very pleased with the business direction and the opportunities. Let's hit the highlights of GENEWIZ first, and then I will also address the slower growth in Sample Management revenue relative to expectations. This is the second full quarter of ownership of GENEWIZ, so it is the first opportunity to check the performance picture for momentum under the Brooks umbrella. And the momentum is strong, turning in $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 that 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. In 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 B3 cryo systems, and though the systems remain small with just $2.5 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 GENEWIZ gross margins of 51%, up 160 basis points from the second quarter performance, and Sample Management gross margins softening 70 basis points, still rounding to 38%. The 510 basis point expansion from Q3 a year ago primarily reflects the favorable mix impact of adding GENEWIZ to the portfolio. Looking at operating profit, we also see 500 basis points expansion year over year, driven by the mix effect of GENEWIZ and performance improvement in 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 the momentum of GENEWIZ to contribute growth and are continuing on a more modest level of growth in Sample Management -- or counting on a more modest level of growth Sample Management, I should say. We are targeting total Life Science revenues 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 GENEWIZ 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 6. 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 1 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 robots going into Tier 1 also saw an uptick in revenue. I would like to highlight the results of the Reticle Stocker business, which we required in April of 2018 for a $16 million purchase price. In the past 12 months, in a low cycle of the Semiconductor CapEx business, we've exceeded $34 million of revenue in the Reticle Stocker business. As Steve indicated, the increase in design wins and qualifications provide promising opportunities across our 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. A 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 2 OEMs and 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 7, 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 and 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. In the acquisition and debt lines, the year-to-date cash flow statement includes the sourcing of funds through debt to make the GENEWIZ acquisition on November 15th. You will not see the pay-down of the debt until the year-end financial statement, since we closed the cryo sale and reduced debt on July 1, the first day of the fourth quarter. Let's move on to the balance sheet on Slide 8. 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 when we report next quarter. With the divestiture closing, we received payment of the cash price on July 1. 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 net 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 9 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 $0.21 to $0.26. 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 $0.75 to $0.80 of non-GAAP earnings per share. This has Life Sciences revenue at about $330 million and 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 our reset of the balance sheet that sets up for another chapter of investment, we invite you to join us for Investor Day on September 17th in New York City. As always, the lines will be open to join from wherever you are sitting. So this concludes our prepared remarks. I'll now turn the call back over to the operator to take questions from the line.

[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.