Azenta, Inc. (AZTA) Q1 2020 Earnings Report, Transcript and Summary

Greetings and welcome to the Brooks Automation Q1 2020 Financial Results Call. During the presentation, all participants will be in a listen-only mode. And afterwards, we will conduct a question-and-answer session. [Operator Instructions] This conference is being recorded, Thursday, February 6th, 2020. And now I'd like to turn the conference over to Mark Namaroff, Director, Investor Relations. Please go ahead.

Thank you. Good afternoon everyone on the line today. We'd like to welcome you to our earnings conference call for the first quarter of fiscal 2020. Our first quarter earnings press release was issued after the close of the market today and is available on our Investor Relations' website located at brooks.investorroom.com as are the supplementary PowerPoint slides that we'll be using during the prepared remarks today. Before we start, I'd like to remind everyone that during the course of the call we'll 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 our actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor Statement, the Safe Harbor slide on our aforementioned PowerPoint presentation on our website, and our various filings with the SEC including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements that we present today. Also we may refer to a number of non-GAAP financial measures which are used in addition to and conjunction with results presented in accordance with GAAP. We believe that non-GAAP 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 the Brooks' business. Non-GAAP measures should not be relied upon to the exclusion of GAAP measures themselves. And 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 up the call with remarks from Steve on the highlights of the first quarter and then Lindon will provide a more detailed look into our financial results and provide a summary of our outlook for the second fiscal quarter of 2020. And then we’ll have time to take your questions at the end of our prepared remarks. And with that, I’d like to turn the call over to Steve Schwartz, our CEO.

Thank you, Mark and good afternoon everyone. We're pleased to report to you results from our first fiscal quarter of 2020. We're off to a strong start to the year with Q1 revenue coming in at $210 million, up 6% sequentially and 17% year-over-year. In the quarter, we began to witness the start of a meaningful uplift in the semiconductor equipment market. And in Life Sciences we delivered performance that was right on plan. Our Q1 momentum supports yet another growth year as we have much confidence in the strength of our markets, the products and services that we've developed to serve these markets, and a very strong customer capture. That said, in the near-term, it's prudent to address the impact of the coronavirus. Today Lindon and I will do our best to articulate to you how we're thinking about our business, what we anticipate in the coming weeks, and we'll share with you a range of outcomes that vary mostly due to uncertainty about timing. I'll now give a recap of our business starting with Life Sciences. Q1 was a solid quarter for Life Sciences as we came in essentially where we'd forecasted. Revenue was $92 million consistent with our guidance and expectations and showing pro forma organic growth of 10% year-over-year. We made significant progress across both subsegments and we accomplished what we intended in order to meet our goals for 2020. I'll start with a review of Sample Management. In Sample Management, we hit our Q1 operating targets that support our objective to return to double-digit growth by year-end and we made progress against the promise for a higher-margin more-profitable business. In terms of our priorities for Sample Management, we're focused on growth and profitability. But before I talk about growth, let me make a comment about our gross margin progress. For most of the past couple of years we've struggled to get gross margin out of the range of approximately 38%. Our margin performance was not from undue pricing pressure or uncontrollable material spending, but rather operational issues that are under our control. As we've said on past calls, over the past six months, we've implemented some organizational and management changes and I'm pleased to say that we're now demonstrating some meaningful progress. In Q1, we delivered another improvement in gross margin to just over 41%, a full 340 basis points above Q1, 2019. We're not declaring victory here as there's still much improvement that can be delivered, but we're already operating inside of our near-term target range for 2020, which was to exceed 40% and we're solidly on a path to operate in the target range of 42% to 44% by 2022. Just to note, the improvements came predominantly from the large Twinbank systems, as well as the increase in volume of shipments of the automated B3 Cryo stores. Second, we're determined to grow revenue by at least 7% this year. Sample Management revenue in the quarter was $52 million, up 3% year-over-year and in line with our expectations. As we mentioned on our last call, we've added more capability to our sales organization and have refocused on more high-value longer-term opportunities that will provide growth. Here are a few examples. We continue to demonstrate growth in the Cryo space that serves the cell and gene therapy opportunity. We added another four new customers, bringing our customer count to 67 and 24 of those customers now own multiple systems. As one indicator of our momentum, Q1 was our largest ever booking quarter for B3 Cryo systems and it included orders for an additional 25 units for a leading IVF company. It will continue to be somewhat of a lumpy business, as the market adoption of this innovative product line takes hold, but we believe that our momentum has begun to pick up and we have great confidence that institutions that are engaged in cell and gene therapy research must have this capability for proper Cryogenic sample management, storage, retrieval and protection. In Q1, we launched a new outreach service that has so far been well received and oversubscribed as we work with some large academic institutions and hospitals, to perform on-site assessments and recommendations about their sample management and inventory challenges. We are confident that this initiative will begin to add meaningfully to revenue in our second half, but more importantly, we believe, that we've developed a service offering that has adapted particularly well to this market segment. And it's one of the target markets we identified for you at our Investor Day. And we passed the 1-million-sample milestone in our new clinical research sample management offering, a solution that provides a new level of organization and security for samples from patients who are enrolled in clinical trials for large pharmaceutical sponsors. To date, we've engaged in more than 250 trials and we're adding value by reducing sample retrieval and delivery cycles and dramatically improving accuracy and quality of sample handling and management. Each of these last two opportunities include physical sample storage, logistics services and the need for a robust informatics solution for the management of inventory. It will take a bit of time for results of these investments to take hold, but we maintain our guidance for the year and we only gain more confidence from the early results of these programs. We anticipate that we'll have sequential growth again in Q2, but it will likely be more than 1/4 more of modest year-over-year growth before we begin to see the shift back to high single digits growth in Q3 with the target still to get to 10% growth by Q4. To summarize, our current position in Sample Management, we're in a high execution mode. Q1 results were exactly on-plan and we started Q2 with the same solid trajectory. We remain confident in our recovery of this business and we are energized by the opportunities that are in front of us. We also delivered another strong quarter in GENEWIZ. Revenue at $40 million was up 22% organically year-over-year and consistent with the impressive growth trajectory over the past few years. Q1 growth was powered by next-generation sequencing, which was up 38% year-over-year. Q1 is usually a lighter quarter for Sanger sequencing as the U.S. and European holidays reduced some of the demand for overnight measurements and though down a few percent from Q4, Sanger still delivered 19% year-over-year growth as we continue to gain share with our high-quality fast-turn service offerings. We added another 200 customers in the U.S. and Europe and we continued our aggressive build-out of capability and capacity as we advance the formation of our new synthesis lab in Indianapolis which is co-located with our main sample storage facility. We intend to be fully functioning this spring. Most importantly, we continue to bring our scientific innovations to market helping customers solve critical challenges in securing business from new research groups, who recognize our breakthrough technologies that we provide. And it's important to note that profile and reputation, the GENEWIZ carries in the scientific community. Immediately, after the outbreak of the Coronavirus, GENEWIZ was contacted by several global international organizations looking for help in the investigation of this epidemic. During the past few weeks, they've been fully engaged in support of numerous organizations including centers for disease control on three different continents. Our teams in the U.S. and China are synthesizing genes that code for the proteins of Coronavirus and synthesizing fragments of the Coronavirus genome, as well as providing numerous other services that will be used in the detection diagnosis and understanding of the outbreak, development of vaccines and production of therapeutic antibodies. Our laboratories and scientists are in high demand and are fully engaged in the service of this important endeavor. We're proud of our contribution and we consider ourselves fortunate to have the trust and support of the teams who're working around the clock to combat this epidemic. Except for the operations team that's been on-site throughout the extended Chinese New Year holidays, the rest of our GENEWIZ China team is away from our labs and will be restricted from returning to work until at least Monday, February 10. Before I conclude my comments about the Life Sciences business, I do want to make note of the significant growth trajectory we're seeing that's driven by cell and gene therapy work. Although still a relatively small part of our portfolio, we estimate that in calendar 2019 our business from cell and gene therapy customers grew significantly, more than 80% year-over-year; a number derived from proforma increases in GENEWIZ of more than 40% and the Sample Management contribution which more than doubled. In total, cell and gene therapy revenue was approximately $20 million in 2019 and this particular subsegment looks set to drive continued outsized growth for years to come. All-in our Life Sciences business is exactly on track to meet our commitments for 2020. We're implementing structural change in the Sample Management business, which are delivering the results that we expect. We still have work to do but we are doing the work and we are seeing the improvements. Similarly we believe that we're making well-placed investments in GENEWIZ for new capabilities and for geographic expansion. And we continue to be impressed by the performance of this strong and dedicated team. We also have a lot to discuss on the Semiconductor side as once again we continue to exhibit a different dynamic from other companies who serve this segment. Q1 revenue of $119 million was up 13% quarter-over-quarter and 5% higher than the same quarter one year ago. We had another quarter of strong market share gains by adding 23 new design wins into next-generation process equipment. Q1 revenue was essentially at our peak levels that we delivered in the June 2018 quarter, which was also the peak of the semiconductor equipment market. What's more is in Q2, we are poised to deliver another new record quarter. We believe this point is significant and that it highlights the value of our unique product portfolio, which is fueling these levels of performance. These high watermark revenue records are powered by foundry spending and CCS product adoption for critical device nodes. We have not yet seen the benefits of memory spending, which drives even more demand for our automation robots and systems and advanced packaging also remains well-below peak levels. The point is we still have a headroom to set new revenue records even before memory or advanced packaging return to prior levels and when they do fully recover, we should remain strong even if foundry spending relaxes a bit. We have a very robust sweet spot, which is supported by many different technology trends and our strong share position allows us benefits from each area and we're on track once again to outperform the semiconductor equipment market. I'll give some specific color from our major Semiconductor business drivers, tool automation, advanced packaging and contamination control solutions. We are now squarely in the middle of an upturn of our wafer automation business. And although our automation revenue is still approximately 30% lower than our prior peak, we grew 12% sequentially in vacuum robots and this is on the heels of a 32% sequential increase from June to September. We anticipate more growth in robots in the March quarter consistent with the Tier 1 OEM forecast increases you've heard about. Advanced packaging was flat with Q4 2019 at $10 million with a soft automotive market keeping lid on this market. We, nonetheless, had six new design wins for various automation modules keeping us in solid position as the market for new advanced packaging continues to develop. And of late we've had much to share with you about the ramp in our Contamination Control Solutions business. Coming off of a record $32 million quarter in September, we jumped to $44 million in the December quarter and that's up 60% compared with December quarter one year ago. The majority of the volume was for food cleaners that were shipped to 7 and 5-nanometer foundry installations, but we're still seeing a broadening of the customer base and for applications beyond foundry. In Q1, we added another five new customers all in Asia, extending our penetration to more customers who are just now adopting CCS technologies who were not yet at the 10-nanometer technology node. These are all promising signs for the future market opportunity. Our outlook for the CCS business is for another very strong quarter in March at revenue levels approximately the same as Q1. If we leave you with one takeaway from our Semiconductor report it's this. We've constructed a unique and valuable product and technology portfolio for these times in the semiconductor life cycle. We grew in 2019, which was a down year in semiconductor equipment; and now, while a peak in the market is still a long way off. We are at historical peak revenue levels. The business we have today is a business that we won years ago, during the early design phases of 10, 7 and 5-nanometer technology nodes and our position is secure and getting stronger. Our R&D approach remains the same, partner and collaborate with top technology leaders years in advance of a production cycle to design an automation solution that perfectly fits with their needs for a process step. Then we lock down the design, perfect the manufacturability and build volume production capability. And today we're securing our future in much the same way, through close collaboration and design win activity. Only today, there are many more global OEMs in our partnership mix. We started 2020 in a strong market environment and we're executing in all of our sectors to ensure that we continue to capture the growth from these opportunities. We look for this year to be our best ever and one in which we more meaningfully deliver the financial results from what we've built. That concludes my formal remarks and I'll now turn the call over to Lindon.

Thank you, Steve. I'd like to refer your attention to the slides on our website starting with Slide 3 and starting with the key highlights. Growth in the quarter is supported with growth in each business as Steve has highlighted. We saw a 38% year-to-year growth in Life Sciences, which includes the final quarter of the effect of the acquisition. The acquisition of GENEWIZ, which occurred in November of 2018 has been a positive addition to our portfolio profile fueling growth, higher margins and cash flow. The organic growth this quarter for GENEWIZ was 22% year-over-year. Sample Management grew 3%. The Semiconductor business is also ramping as we expected up 13% sequentially and showing 5% growth year-over-year. We didn't experience a decline in 2019 that most Semi CapEx companies did and now we've returned to the range of that prior peak, which is up 5% again year-over-year but is also 25% higher than two years ago. The increase of momentum in this period came from the record shipments of contamination control solutions to chip manufacturers and growth from vacuum robust shipments to our large OEM customers. We had 37% growth in our non-GAAP EPS year-over-year. The highlights driving EPS are really centered around the revenue growth in each business, the growth – the gross margin performance improvement in Sample Management and the profit profile which we added with the GENEWIZ business. Cash flow from operations was strong from our first fiscal quarter, when we pay out our variable compensation for the prior year. The operating cash flow was $26 million in this quarter and this followed a strong fourth quarter of fiscal 2019, where we highlighted $46 million of adjusted cash flow driven from the continuing operations. With approximately $210 million net cash available for operations and investments, we have ample cash available for taking in smaller acquisitions and sizable debt capacity if and when the next transformative acquisition materializes. Let's move on to Slide 4 to review the overall P&L in depth. On a GAAP basis, we're reporting $0.18 in earnings per share for both continuing operations and total company basis. The continuing operations is an improvement from $0.07 in the fourth quarter and from $0.09 one year ago. On a non-GAAP basis, over to the right side of the page, we have reported $0.23 of EPS, approximately the same as the prior quarter and $0.06 improved year-over-year. With strong revenue growth on both the sequential and the year-over-year comparisons, the non-GAAP gross margins were stable on a total basis. However, there are different dynamics within the segments. The 20 basis points of improvement in the year-over-year comparison reflects a significant 350 basis point improvement in Life Sciences' gross margins. This is consistent with the trajectory we had modeled for this year and our long-term outlook and should continue to perform at this level or better. We saw a 210 basis point decline in Semiconductor gross margins, significantly affected by the mix of revenue reflecting a rise in shipments to Tier 1 OEMs and less to the Tier 2 OEMS. We see the second-tier picking up in the second half. For this first fiscal quarter, 44% of the revenue for the quarter was driven by Life Sciences. So, the increase of mix toward Life Sciences and the strong performance in the Life Sciences margins lifted the company margins upward overall. If I take you to the bottom-line for a moment, over the course of the year, there is good progress evident in net income margins and EPS. But on a sequential basis, we ran into a headwind. Operating expense naturally expanded over the year with the acquisition of GENEWIZ and its related investments. But what held us back from showing additional progress in the quarter was above of approximately $2 million of expense related to some professional service fees, primarily audit and legal fees to address the material weaknesses we disclosed in December when we filed our Form 10-K. We expect this will come down in the second quarter to less than $1 million and will be behind us at the end of the second quarter. In the non-operating expense lines, interest expense came down from $5 million a year ago to what rounds to zero for the quarter. A year ago we carried significant debt associated with the GENEWIZ acquisition, but we no longer have that burden. The non-GAAP tax rate for the quarter was about 23%. This is about three points higher year-over-year and five points higher than the fourth quarter. The higher rate is driven primarily from the jurisdictional mix of our income. We continue to expect the tax rate for fiscal year 2020 to be in the range of 21% to 25%. In total, the non-GAAP net income increased 40% year-over-year and non-GAAP EPS is up 37%. While the earnings is essentially flat sequentially at $0.23, I will emphasize that the increased professional fees put approximately $0.02 of pressure on the earnings in the quarter and I expect this item to lighten by $0.01 in Q2 and to be fully behind us at the end of the March quarter. Turning to Slide 5, I will discuss our segment results starting with Life Sciences. In the first quarter, Life Sciences revenue was $92 million, up 38% year-over-year. $40 million revenue came from GENEWIZ and I'll remind you that in Q1 of last year, we own GENEWIZ for one-half of the quarter as we acquired the business on November 15th, 2018. GENEWIZ provided 22% organic growth in the quarter. The Sample Management business provided 3% organic growth year-over-year consistent with the expectations for the slower start of the year. We continue to expect this to trend upward in the second half with stronger growth to bring us to approximately 7% for the full year. On a pro forma calculation for the full quarter, the total segment grew 10% year-over-year. And as Steve outlined, we have strengthened and invested in the sales engine and are beginning to see some fruits in the pipeline for higher growth in Sample Management in the second half and into 2021. Operating margins are on a clear path for expansion. You can see this progress is largely driven by the gross margin results. I will clarify here that the operating expense pressures in the quarter affects both segments similarly and is holding back some of the margin progress from the bottom line, which we expect to be resolved by the end of the second quarter. Driving this gross margin improvements we – was indeed the performance in the Sample Management business and the mix benefit of a full quarter of GENEWIZ. Inside Sample Management we saw another quarter of sequential improvement of more than 100 basis points which is driving year-over-year improvement of the 340 basis points on that business. Sample Management margins benefited from improved performance in the product lines of our large Twinbank store systems and also again from the growth of the B3 Cryo store systems. Looking into the second quarter, we see momentum of the Life Science business, but also take some caution on the impacts which the coronavirus may have on our revenue and operations in China. While a portion of our GENEWIZ China team has been allowed to work in supporting the critical request for battling the virus, the market inside China has broadly shut down until next week. This has had some impact primarily on our GENEWIZ business. In light of this, we are ranging our guidance for Life Science revenue in the second quarter to be $90 million to $95 million. Let me be more explicit about this. If we can recover the impact of the coronavirus, then the momentum of the business would center the guidance at the top end of the range toward $95 million. The lower end of the range accounts for some downside in the event that the problem constrains the China market longer than expected. The current midpoint is where we center our guidance, assessing a $2 million to $3 million impact from the constraints in the China marketplace. Let's turn to slide six. Semiconductor Solutions revenue was $119 million in the first quarter, an increase of 13% sequentially and 5% year-over-year. The increases at this point are coming from continued strength to Contamination Control solutions, primarily in our wafer carrier cleaning systems and increased demand in vacuum robots, which are shipped primarily to the Tier 1 OEMs. This ramp has not yet included any benefit of increased system shipments to the second-tier OEMs. As anticipated at the time of our Q1 guidance, this product mix does have a downward impact on the segment gross margins, which was down 150 basis points sequentially. We expect more broad-based demand and vacuum systems to begin to pick up in the second half, which will support margin improvement through the year. Looking into the second quarter, we see continued strength in vacuum robots to Tier 1 OEMs and are seeing pickup of the systems business. Overall, we expect the semi revenue to be in the range of $123 million to $130 million. Currently, we have assessed and are not expecting the coronavirus situation to have a significant impact on our Q2 semiconductor performance. We continue to monitor the situation daily. Let's turn now over to slide seven for a summary of our cash flow for the quarter. We generated $26 million of operating cash flow and $16 million of free cash flow. As referenced earlier, this is an exceptionally strong cash flow for our first fiscal quarter of the year. Over the past six months, we have generated approximately $70 million of operating cash flow from our continuing operations. CapEx amounted to $10 million for the quarter, driven primarily by investments in operations and includes less than $2 million in the initial start of the new GENEWIZ facility in Suzhou, China. The total expansion of cash and marketable securities this quarter was $11 million, bringing the total as of December 31st to $353 million. On slide 8, you will see a summary of the balance sheet. You can see the $353 million ending balance of cash and marketable securities at the top of the December 31st column. If you scan down the column, current liabilities include $93 million of tax obligations for the gain on the sale of Semiconductor Cryogenics business, which we paid in January. You can also see we have a total of $51 million of debt. So by adjusting the cash balance by the taxes paid and the debt, we have approximately $210 million of net cash for operations and investments. I'll now wrap up on slide 9 with our guidance for the second fiscal quarter of 2020. Revenue is expected to be in the range of $213 million to $225 million. Adjusted EBITDA is anticipated to be $32 million to $38 million. And non-GAAP diluted earnings per share to be $0.22 to $0.28 per share. We have factored in the current China environment for the coronavirus with expectation that most of the China economy is back to work in mid-February. In addition to this guidance, we also continue to expect a non-GAAP tax rate of 21% to 25% for the year. This now concludes our prepared remarks and I'll turn the call back over to the operator to take questions from the line.

Thank you. [Operator Instructions] And we have a question from the line of Paul Knight with Janney Montgomery. Please go ahead.

Hi guys. It's actually Mike on for Paul. Congrats on the quarter.

Hi, Mike, thank you very much.

So on the sample management side, that's obviously been the one that has been kind of the most volatile that we've seen. Can -- Steve can you kind of just talk to what gives you guys the confidence and the visibility to actually see a continued ramp-up in the other quarters and hit that 7% growth for the full year?

Sure. Yeah, Mike I think you said it exactly right. We had some volatility. We've done a lot to stabilize first the internal operations of the group. I think of making really good progress there. We've added some sales capability and we focus on a couple of initiatives that I just talked about. One the clinical trial samples, we call Sample Hub started to have good traction, good success. And frankly that's back to the sweet spot on our Sample Management capability. We can see real traction in the Cryogenics business. The booking levels are meaningful and significant. And those tools will be delivered through the year. So it's not a sugar high. We get some bookings and we'll distribute the tools out through the year. So we have some pretty good visibility there. And frankly there's just hard work left. We've got some contracts that we're working on that we anticipate will bring in and we want to stay, so that we're not too aggressive on the timing because we don't want to miss on the timing. So I think we have good visibility into what the back half of the year looks like. It will work like crazy to see if we can pull some of that stuff into the current quarter, but we're a little bit more confident about what Q3 and Q4 look like. But again, it's started to build in backlog and a lot of the customer contract activity.

Thanks. And then just on the GENEWIZ front, kind of, it looks like a record quarter there. Can you kind of just talk to, is that a result of just GENEWIZ executing and being such a great business that you guys acquired, or are you starting to see some synergies with a result of combining a Life Science business and your customer base? Thanks.

Lindon and I want to take full credit for everything that GENEWIZ is doing. But, frankly, it's an outstanding team, Mike, and they were on a trajectory. So this is the thing that GENEWIZ knows how to do. They expand, they developed capability, they capture customers and they win business. I think our contribution here so far has been that we haven't constrained capital and we've allowed some of the expansions to take place. In some of the regional labs, we did a pretty significant modification of the laboratory in New Jersey, to allow some of the expansion of NGS. And, frankly, there are synergies that are beginning to show. And one of the things that we haven't talked too much about is, between the Sample Storage business and the GENEWIZ team; we think there are real synergy opportunities there. We started by exchanging leads and customer contacts and meaningfully, now, we're starting to see things transmit between the two organizations that help both businesses. So, again, GENEWIZ has that capability built in. We do think that there are benefits accruing to both sides of the business. And it's our hope and our desire and a lot of energy we're putting in to make sure that we can accrue benefits to both parts of the business, by having them work more closely together, but the teams are doing that organically. And, right now, we're starting to see the kernels of what we think is great promise for us.

Thanks for the time, guys. Appreciate it.

Thanks, Mike.

And our next question is from John Pitzer with Credit Suisse. Please go ahead.

Yes. Good afternoon, guys. Thanks for letting me ask the questions. Steve, I guess, my first question, just on the semi side of the business. You guys had an excellent calendar year 2019, with some sort of company-specific drivers. As we look out to calendar 2020 and just kind of look at the WFE forecast that are out there, you've had two the front end guys come out and give somewhat different views. One talking about potentially as much as 20% year-over-year growth in WFE; the other, kind of, closer to 10%. I'm just kind of curious, how you'd characterize, sort of, just the backdrop of the spending environment? But perhaps more importantly, how do we think about your growth in that context with some of the company-specific drivers?

Yes. Thanks John. That's one of those things that's on our white board every day. But let me do my best here. A couple of things are happening that are just the general growth drivers for our business, whether it's 10% or 20% growth rate. The content in foundry, from 10-nanometer to 7-nanometer, to 5-nanometer and ultimately to 3-nanometer, the content for Contamination Control continues to go up. And I won't say it's exponential, but it's certainly multiplicative in terms of how many tools and how much content we have when the device node shrinks. Just even a consistent level of foundry spend from one year to the next, but from one node to the next, would increase our business necessarily. So a flat spend, for example, from TSMC, but if they went from 7-nanometer to 5-nanometer, a flat spend at the CapEx level would be an increase for us, because they put more of our cleaning tools in, as an example. By the same token, the complexity of the device spend for the vacuum processes for really sophisticated deposition and etch steps and a higher number of -- higher count of those process steps is what we saw in the 2017, 2018, 2019 timeframe where we had a lot more vacuum technology content, so that even in a down semi environment we grew. So we anticipate that those trends are continuing into 2020. Having said that, I'd be hard-pressed to tell you if it's a 10% or 20% number, but if it's 10, we anticipate we'd outgrow that. If it's 20 we had anticipate, we'd outgrow that for the same reason.

So perfect. So just not to put words in your mouth but despite outperforming last year, you don't think that the harder year-over-year compares prevents you from out of performing this year again?

Yeah, John that's a really good question. Just because of the high level of foundry spend, we -- it gives us a lot more confidence. If foundry fell off and we were relegated to the things that weren't high-end foundry, we'd probably be back -- we still anticipate would be higher than the industry. We would probably be closer to it, we wouldn't have such a big gap between our performance and industry performance. It's how we think about that.

That's helpful. And then just on the coronavirus, I appreciate you guys sharing thoughts. I'm just kind of curious, if you've embedded any uncertainty around the virus in the semi business? And is it only revenue uncertainty, or are you trying to curtail expenses in the quarter to match some of the revenue uncertainty, or will you spend regardless? I guess the question being is if the revenue uncertainty doesn't show up is there a lot more leverage in the March quarter earnings?

Yeah. So John let me try it this way. We look at our supply chain and it feels like we're covered for the quarter. And so we don't anticipate issues. We do have things that are -- that China would impact, but we think we've managed those pretty well. The thing that we would not be able to account for is for example if a fab didn't take product or if part of the supply chain prohibited a different supplier who puts a critical subcomponent into an OEM who suddenly can't ship a tool for another reason. They may not need to take our robots for example if they had other reasons they couldn't get tools shipped. But right now, our semi forecast is pretty solid based on how we look at it. And so we don't have much risk hedge built in there on coronavirus, but we are paying close attention. We think our supply chain is secure. But if a customer couldn't open a fab to take tools that would have an impact. And if another supplier had trouble with their supply base and couldn't get components that shutdown the OEMS then that would have an impact on us.

And then just my last question, a pure Life Science question. You guys have done a good job on the gross margin over the last several quarters. You talked about 42% to 44% by 2022. I'm just wondering, if you can talk about the drivers that get you there? And how we should think about the linearity from here to there over that time period?

Yeah, John I'll chime in here. And as you know Steve is managing Sample Management pretty closely nowadays, so I'll give him the option to chime in as well. But our primary dynamic as we said before is really driven -- twofold; one, the growth of GENEWIZ is a natural help on gross margins. And this was the last quarter of a mix benefit just due to the contribution of the incremental acquisition year-over-year. Next year it will be a full -- next quarter it will be a full compare year-over-year on a GENEWIZ mix. But the growth has been faster at this 20%-plus trajectory, so that's a nice mix benefit. But more -- and equally and more impactful is the performance step function that we've been able to see opportunity around Sample Management. Inside Sample Management, it's largely around the product shipments, not the services as much. Service has been pretty stable and nice margins. But the product shipments is significant. And this includes some cost of materials, but more so cost of quality and cost of labor in those quality and/or project management steps. And this is where we've been able to take a fair amount of cost out. I'll highlight that, as we've disclosed before, as Steve stepped in, we did take a senior executive from our development quality, the head of semi development who had already helped to influence the Life Sciences business in the past years, especially, when we were first building the business from the strength of our Cryogenics-based semi business. But he's now stepped in and full-time on Sample Management on the quality side and applying those semi disciplines. It's already seen -- we've already seen the impacts of his actions, but there's still more opportunities laying there to be gathered. So we see more traction. But to really reinforce what we called, is what happened and that is a significant improvement in the systems, the large systems most notably. And then we got another nice benefit as we're ramping this B3 Cryo system. That's really coming from the size of that business and critical mass and improved margins from that, not so much a cost issue, but just on size. So both of these are -- we expect to continue to help in carry us. And this isn't a territory that's completely foreign to us. We had been above 40% three-plus years ago and we've been struggling with this. But, I think, we've really -- we feel confident in the trajectory here, for the rest of the year being above 40s, I should say, above 40%. As Steve highlighted, we struck 41-plus and getting to 42% to 44% seems pretty reasonable for us going into next year.

Thanks, guys.

Yeah. Thanks a lot, John.

And we have a question from Craig Ellis with B. Riley FBR. Please go ahead.

Yes. Thanks for taking the questions. I appreciate that. Steve, I wanted to follow-up on some of the earlier questions on semi to start. First, the example you gave when you talked about some of the strength in the business and maybe it was just directed at CCS, the 7, 5, et cetera, increased content intensity. Clearly, we've got a very strong foundry and logic spending environment now. Is your sense that some of the strength that you're seeing in the business yet is related to memory, or is increased memory spending still in front of the business and something that we see later in 2020 and potentially 2021?

Yes. Craig, thanks. For sure on the CCS side, it's heavily foundry spending right now. And we don't see much at all at this moment from memory. And so, we'll draw our conclusions from that. We do anticipate that some of the vacuum automation systems that we're shipping though are from memory, but it's difficult for us to tell. However, having said that, a pretty significant part is foundry, but the customer base for the CCS products is now more than 70 different customers. And so, we anticipate that when memory does pick up, we'll start to see some of the shift from -- maybe, from foundry goes into memory. But, right now, our understanding is that's still coming behind the pretty significant foundry logic spend.

And how are you feeling about CCS's capacity at this point Steve as you look out over a 12 to 18-month period?

We're meeting some pretty -- we made it through a pretty good ramp and we're not constrained at all. If business picked up 30%, you'd probably hear us growing a little bit. We've got good supply base, a good partner on the contract manufacturing side and they've kept up extremely well. We -- frankly a year ago, we wouldn't have anticipated levels like this, but I think we had enough advanced look in preparation that feels pretty good. So we're about at the levels that feel really good to us. But anytime you get to a threshold like this, you're always thinking about what will you do when you have the next ramp like this or you have to hit these kinds of capacity levels? But we do have room to move, we can't do it quickly. And at the moment there's not a need to do it quickly. We think we've got the current quarter covered as well and it gives us a little bit of breathing room if we need to be able to find a way to add some more systems.

Got it. And then switching to Life Sciences. Thanks for giving us the data point on cell and gene therapy at $20 million last year. Can you just talk a little bit more about the things that Brooks is doing to grow in that area? And how should investors think about the multiyear revenue potential that's in front of the company from a base that is small, but it's clearly getting bigger pretty quickly?

Sure. So Craig, I'll give you a couple of -- I'll give you a couple of data points here, one from the GENEWIZ side, and one from the Cryogenic side of the system and it's interesting. We're starting to see the same customers there and we do anticipate that ultimately there'll be some convergence of opportunity, satisfying the research side, the Sample Management side. One of the things that we're really proud of is that recently and Craig I don't know if this will mean particularly lot to you, but to some of the people on the call it will and I'm working to make sure that it means a little bit more to me as I get a little smarter about it. But GENEWIZ has developed among other things a proprietary technology that's related to a particular virus an AAV ITR, which is a necessary construct for people who are doing research in the cell and gene therapy space and it's extremely hard to sequence through. But the delivery of the therapeutic on a virus is accomplished by this construct and GENEWIZ has a proprietary means by which they can read this construct and it's unique in the industry. And they beta launched it last summer and the acceptance has been overwhelmingly positive. A lot of enthusiastic people participating and that's something we rolled out just recently beyond the U.S. into Europe and China and their reception has been extremely strong. And we see the customers continuing to come to GENEWIZ. When you see us and hear us talk about this incredible customer capture, it's not just the centers for disease control that know about the capability of GENEWIZ, it's the research of who are in and around this space. And when we imagine how big the opportunities might be, it's tough for us to gauge but we do know billions of dollars are being spent on the research for cell and gene therapy. And the GENEWIZ team has focused initiatives on how to support that capability. And if you mentioned AAV ITR sequencing to people in and around this space, they would ever tell you about the complexity of it the necessity of it, all still wouldn't know about the ability to sequence through it, that like the GENEWIZ team can do. But we're really proud of that capability and really excited about it. And inside the walls of the company, you heard people talking about that. The other one is, I'll talk about some of the cryogenic activity. And again, this is where, on the Cryogenic side, we're getting a lot closer to understanding the science and what's necessary. And so, we're building new skills and scientific capabilities inside the Cryo team as well. But in the first quarter, we continue to make progress with CAR-T immunotherapy leaders in the market. We shipped one – first store to a customer and a follow-on store to a second and these are customers who have a very strong interest in the product line in various configurations and it's to support their R&D, their quality control and their whip of the of the products that they manufacture for approved gene therapies and cell therapies. And so, that's an important one, because it's down the road from just, how do I manage this from a research standpoint, what do I do to construct a complete manufacturing cold chain cycle? And what we're finding is that, although, the early products are really related to what are called autologous immunotherapies, there's a lot of R&D going on in next-generation allogeneic therapies and that's why there's an expansion of these Cryo systems. People need to maintain – not just maintain the samples, but they need to begin to develop the means that they'll handle them, so that they can get the approval from the FDA in terms of what's their GMP in terms of how to handle the sample. So we're excited and we're enthusiastic. Each one of these customers has pretty significant demands on us as a relatively small company, we give them full attention about the formats they need, the test that they need to be done. But we don't see anything but considerable upside. And as we go forward, I think, that it's noted from -- Craig, from you and some others who are on the call, that we'll try to do a better job to let you know how we're doing and the growth in the cell and gene therapy space and we'll try to report to you. But we see considerable upside across the company. I'd be hard-pressed to put a number on it, but the initiatives we have, we think, are right in the center of what's going to be necessary for growth and development in this space.

That's helpful. And then the last one before I hop back in the queue, Lindon, as I look at the segment dynamics quarter-on-quarter, we've got rapid Semi growth and we're flatter in Life Sciences, unless there isn't that coronavirus risk that you've earmarked. But it seems like there would be a downward drift in gross margin at a segment basis, I'm not sure what's going on, on a subsegment basis, but can you just talk about the puts and takes in gross margin? And then, if you can, what you might see as you look out to the June quarter? Thanks.

Sure. Really, I think, right now, I would guide that in the center of our guidance, we're expecting approximately stable margins on a sequential basis. So Semiconductor, while we're starting to pick up, for example, in systems, it's not as much in the backroom systems. It's not quite broad-based as what we expect to see in the second half of our fiscal year. When that comes back, we expect our gross margins in semi to come back to those levels that we've seen this last year. And in the Life Sciences space, while I expect to have a little bit of benefit – additional benefit in Sample Management, I think, overall, in our financials here, we're counting on just above flat, stable gross margins. And there's a little – there is a bit of question on GENEWIZ in terms of the impact that we carry in the China space on the coronavirus and the impact on operations. So right now we're being -- I don't want to describe it as conservative, I think we're being responsible in the guidance that we've given you around the flat margins.

Thanks guys.

Thanks Craig. Appreciate the attention

And we have a question from Jacob Johnson from Stephens. Please go ahead.

Hey, thanks for taking the question. I would be interested in your latest thoughts on the Indianapolis facility. I think you announced a 20% capacity expansion a couple of weeks ago Just be interested kind of where capacity stands today? And how much is being utilized currently?

Yeah, this is a reinforcement of what's happening in Indianapolis and in the storage footprint. And in -- what's happening is we're pushing the last step of our warehouse space that we had gathered. But I want to put this in the right context. The warehouse space that we have is in a industrial park near the airport. And I mean, it's a nice industrial part. And we had had rights to expand into certain additional I'll call it caves or the next phase of the building. And we expanded one more and we made the investment to fit it out. That fit out includes the electrical and the air conditioning around it and it gives us that 20% increase. Put it in context up until that time since the beginning of when we've owned it in 2015, we've just about doubled the footprint of the site. And so this is another step, probably consistent on an annual basis and reflects the growth that we see. And I'd highlight that I have often described this as a variable CapEx. We take this step of investment in this fitting this up, but we don't put the freezers in until the week before we see samples coming in. So we generally put a few freezers in as the demand is coming in and we have that set up. So some of you have seen photos that I've shown, but it's just empty racks of electrical harnesses ready for the freezer drop in right in a row and that's why I call it a variable CapEx. We don't have idle freezer sitting empty for very long. It's just a few -- it's just ahead of demand. So I appreciate your attention on that side of the marketing releases.

Thanks for that one. And then just one other question, just on 2020 EPS guidance that we put together, first quarter results and the second quarter guidance, it implies kind of a back half loaded year. From your comments, it sounds like you've got some visibility into a strong second half. But I'd just be curious any additional thoughts you have as we think about how 2020 plays out particularly on the EPS line?

Yeah. So I think point number one is there's nothing that we have crossed or seen that takes us off of the viewer trajectory that we planned for the year. So we had always -- if you go back over our remarks, I'll just highlight that we saw the semi through verbal indications of what was going to happen from the time prior to our Investor Day that we would -- and we had a very strong order load in September, all around contamination control, gave us a good sense and additional groundwork for discussions on what would happen on our other customers. And so while orders don't come in generally until the quarter before in semi, it gave us a strong indication that the first half was going to write on contamination control. And we were starting, we were really pleased to see the start of the ramp in September and then again in December of the Tier 1 OEMS, which confirmed everything that you would be hearing in the market as well. And meanwhile, we also shared with you that the systems business, we didn't anticipate would be coming back inside this first half, that it would be more of a second half comeback, possibly start to tip up in March quarter and on the hold, this is exactly what's happening. So we have confidence in that. And so, as I included in one of the other questions, I'll comment, again, with that coming back, we do see improved margin profile in that Semi business in the second half, because the Systems business and the more broad-based Customer business, both -- even in Contamination Control, but especially around Systems, will provide us a little broader and more robust gross margins to leverage with the growth. Now on the Life Science business, with the caveat of this hesitancy on the coronavirus in the second quarter, which we perceive and believe will be a pause, not a significant hesitation for the year, given if that holds true, we're very encouraged for the reasons Steve outlined that GENEWIZ continues to have a very significant year with a 20% growth for the year. And, in fact, we are seeing the momentum that some of these developments that he highlighted the AUV ITR capabilities the -- actually the relying upon gene was by some of the CDC organizations and the heightened critical nature of some of that business is actually helping strengthen relationships and expose us to more and more engagements at an institutional level. So we're encouraged by that momentum. And so nothing there would change. And then on Sample Management, it really is on track. And I hammer home here that gross margins were on and above the objective that we had for the average for the year even in the first quarter. So the margin profile is solidly in place, as you would expect. That's more in our control. Influencing demand, we've had traction in the opportunity pipeline and it is developing around the things that Steve highlighted and we see have some visibility to line of sight of that producing opportunities in the second half. And we're very encouraged on the other developments, so particularly around cell and gene therapy and the B3 Cryo momentum. So everything so far is really on the trajectory that we talked about. We had a couple of hesitations. One, the coronavirus; secondly, I dealt with a little more OpEx here in the first half than I would have liked to have done. We'll get that behind us. But, yes, we expect the second half to double, so I don't have any reason to back off the model.

Got it. Thanks Lindon.

Yes. Thank you.

And, I believe, that's all the time we have for questions. I'll turn the call back to Lindon Robertson, CFO.

Yes. Thank you very much, Scott. And we so appreciate the attention and the interest that we get. And we always see a significant amount of interest immediately after the calls as well and we welcome that. Mark Namaroff introduced the calls for us here, but he's active every day with our investor family. We invite you to call in and reach out to him. You can find his contact on our IR website. And we look forward to seeing you through between now and the next quarter, but certainly look forward to seeing you on the next call. So thank you very much.

That does conclude the call for today. We thank you for your participation and ask that you please disconnect your line.