Azenta Inc

NASDAQ:AZTA

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Q1 2018 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, February 1, 2018.

I would now like to turn the conference over to Lindon Robertson, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

[Lindon Robertson, executive]

Thank you, Christopher, and good afternoon, everyone. We would like to welcome each of you to the first quarter financial results conference call for the Brooks fiscal year 2018. We will be covering the results of the first quarter ended on December 31, and then we will provide an outlook for the second fiscal quarter ending March 31, 2018.

A press release was issued after the close of the markets today and is available at our Investor Relations page of our website, www.brooks.com, as are the illustrated PowerPoint slides that will be used during the prepared comments during the call.

I would like to remind everyone that during the course of the call, we will be making a number of forward-looking statements within the meaning of the Private Litigation Securities Act of 1995. There are many factors that may cause actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor statement, the Safe Harbor slide on the aforementioned PowerPoint presentation on our website and our various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today.

I would also like to note that we may make reference to a number of non-GAAP financial measures, which are used in addition to, and in conjunction with, results presented in accordance with GAAP. We believe that these non-GAAP measures provide an additional way of viewing aspects of our operations and performance. But when considered with GAAP financial results and 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 the GAAP measures themselves.

On the call with me today is our Chief Executive Officer, Steve Schwartz. We will open with his remarks on the business environment and our first quarter highlights, then we will provide an overview of the first quarter financial results and a summary of our financial outlook for the quarter ending March 31, which is our second quarter of the fiscal year 2018. We will then take questions at the end of those comments.

During our prepared remarks, again, we will, from time to time, make reference to the slides I mentioned available to everyone on the Investor Relations page of our Brooks website.

With that, I would like to turn the call over now to our CEO, Steve Schwartz.

[Stephen Schwartz, executive]

Thank you, Lindon. Good afternoon, everyone, and thank you for joining our call. We're pleased to be able to have the chance to update you on the results of our first quarter.

Coming off a 2017 fiscal year in which we grew revenue by 24%, we delivered Q1 performance that has us off to another fast start in our fiscal 2018. Revenue for the quarter was $189 million, up 18% from a year ago, with growth again coming from both Semiconductor and Life Sciences. And we entered the year positive about our outlook as bookings in the quarter were solid $225 million, including $59 million from Life Sciences. We're encouraged by the projections and optimism that surround these 2 markets, and our confidence comes from the fact that our offerings are targeted at critical technologies that are fueling much of the strength in these markets.

In Life Sciences, growth is the theme, as the discovery process for cures is driving a tremendous increase in the number of biological samples that are being collected and stored and an exponential rise in the number of analytical test and genomic sequencing measurements that are being performed on millions of samples every month. The care and precision that's required to properly collect, store, track and transport these samples is of tremendous importance and is driving research organizations to move toward automated sample management and/or completely outsourcing the management of their samples to a full-service provider like Brooks. We're still in the early innings of this rapidly evolving industry, but we're extremely well positioned to both define and capture this opportunity.

After a record year for the semiconductor equipment industry, we still see strong growth powered by an insatiable demand for solid-state memory and high-performance logic chips that support the next wave of mobile devices. Memory capacity expansion has been a driver of late, but later this year we anticipate an increase in logic production, which should sustain the high level of capital equipment purchases.

So let's talk about the quarter and the steps we're taking to win and grow. I'll begin with a recap of our Life Sciences business performance. Life Sciences revenue was $47 million, our 10th consecutive quarter of sequential growth, and up 42% from a year ago. Organic growth was 22% driven by strong organic growth across the entire portfolio. Automation was up 40%. Consumables and instruments up 30% and services and informatics up 15%.

As I mentioned, bookings were $59 million, increasing our backlog for this segment to $270 million, a new record level. Our order pipeline remains strong and supports our expected 30% revenue growth in 2018. We continue our aggressive growth trajectory by adding 37 new customers in the biotech, pharma, clinical, academic and consumer-driven markets. We had 11 new customers for storage services, including a contract for us to set up and manage a newly constructed large dedicated sample storage facility for a prestigious research hospital, an example of the desire for owners of large, diverse, complicated sample collections to outsource to capable and competent stewards of their invaluable assets.

And significantly, we had first sales of our automated acoustic sample tubes following 2 years of joint development with an acoustic dispensing liquid handling equipment manufacturer and a global pharmaceutical company. The acoustic tools will be stored and managed in our specialty-built, high-density automated storage system.

The integration of our 2 most recent acquisitions, PBMMI and 4titude, is progressing extremely well. We're pleased with both of these companies, whose performance is exactly on track with both accretive in the December quarter and meeting the performance that was committed and expected.

In our cryo business, we added 7 new customers including large first-time biopharma and biotech customers, a hospital network and universities and research institutes across a broad global mix. We now have B3C cryo systems installed at 30 customers and a growing list of cell and gene therapy leaders, who are adopting our cryo solutions into their SOPs. And we're steadily and confidently building our pipeline of companies, who need the hardware and informatics capabilities that we've developed if they're to be successful bringing innovative therapies to market.

With Q1 revenue of $47 million, solid bookings and a clear path for additional strong growth this year, we've created a substantial business that's on firm footing and is gaining momentum. Over the past years, we've invested to create a complete and comprehensive sample cold-chain portfolio that uniquely serves an expanding and exciting market.

We've worked to capture customers, geographies, footprint, technologies and product expertise to secure both mind share and market share.

As we approach the $200 million annual revenue run rate, we're also in a position to effect the next level of performance in our Life Sciences business model. We've implemented operational improvements, sales infrastructure and R&D investments that will positively impact our operating results and sets the stage for us to improve profitability through the year and deliver 10% operating income by the September quarter and keeps us on track to deliver our 29 target -- 2019 target of 15% operating income. At this juncture, we're confident of our ability to continue to expand, and without sacrificing growth, this is also the time when we can begin to deliver more of the profit potential from our Life Sciences business. This is a signal of the strength and vitality of the business that we've created and will allow us to demonstrate robust growth and increased profitability. This is not a change in our direction but, rather, the next stage in our evolution of a healthy Life Sciences business.

That said, we also plan to remain acquisitive as we have a considerable pipeline of potential targets that will support the build-out of our cold-chain capabilities. But we'll be disciplined in our approach to these opportunities, as we already possess a complete cold-chain solution and any additions to our offerings will be to add more capabilities and/or more customers that can help us to grow even faster.

I'll now turn to a recap of our semiconductor business in which we delivered another strong quarter and further enhanced our position for the future. Revenue at $142 million was up $4 million quarter-to-quarter. Bookings of $166 million support projections from our larger customers, who look forward to another strong year in wafer fab equipment spending with the likelihood for more growth after a record 2017.

Nearly all of the increase in our semiconductor business came from the combined revenue of our 3 critical high-growth segments of vacuum automation, for deposition and etch, advanced packaging and contamination control, which increased 9% sequentially from the September quarter, and that's inclusive of the decrease in our CCS business. These segments currently represent approximately half of our semiconductor revenue.

The balance of our semiconductor business remains strong but relatively flat quarter-to-quarter as our cryo vacuum business and Polycold chiller business remains robust that is near-record levels. And product lines that include 200-millimeter products, load ports RFID and other automation products were also steady and profitable.

Looking into the March quarter, we anticipate the most significant part of our semiconductor revenue growth will again come from our 3 key growth drivers, and demand for our legacy leadership products will stay healthy with the potential for some upside.

I'll give some color into our key semiconductor segments. Once again, our vacuum automation business continued to strengthen because of the continued boom in the volume of deposition and etch applications. Overall, vacuum automation revenue was up 12% quarter-to-quarter driven by continued high demand for vacuum robots from our Tier 1 OEMs but also significant integrated vacuum system business from Tier 2 OEMs who are predominantly domiciled outside of the U.S. We also continue to build for our future as we capture additional key design wins for our next-generation vacuum robots, the MagnaTran LEAP family. At Tier 1 OEMs, we secured another 3 additional high-volume tool platforms by replacing their internal captive designs on previous generations of tool sets. This continued trend to outsourcing automation to us is accelerating among OEMs not only because of our technical expertise but also because of the significant improvements that we've made over the past years as a high-volume high-quality supplier. Since the beginning of 2017, we have won 9 new tool designs for our next-generation automation products. These wins will begin to generate meaningful revenue when the OEMs start to ship next-generation process tools for production in 7- and 5-nanometer factories.

We forecast yet another record quarter for vacuum automation products in the March quarter from across the entire spectrum of our customers, including more activity from Korean and Chinese OEMs, who are dedicated adopters of our automation solutions to serve the significant equipment opportunities they have, selling process tools in their respective domestic markets.

Our revenue from advanced packaging applications was, again, strong and is proving to be more steady-growth opportunity. As we'd anticipated, the end market for advanced packaging is now expanding to include meaningful opportunities beyond just TSMC's integrated fan-out lines to now include outsourced assembly and test facilities and some specialty fabs. Although it's still not an easy market to forecast, we do expect that this trend will continue as packaging technologies are becoming critical for broad mobile and IoT applications and will become more the norm rather than the exception, leading to more growth from this sector.

Advanced packaging revenue for the quarter was $14 million, up 13% sequentially and up 50% from the same quarter 1 year ago. We're confident in our ability to win in this segment, and we're investing in next-generation technologies to be able to handle what will be even more sophisticated substrates in the near future.

Although the market opportunity is still relatively small compared with front-end equipment, it does provide us with a significant opportunity for continued growth in this business, which has already become approximately 10% of our semiconductor product revenue. Our outlook for this segment is for more steady growth in 2018 and certainly for more design wins with new and existing customers.

As we've guided, CCS revenue for the quarter came in just shy of $14 million, a decrease from September's $15 million and the third consecutive quarter of lower revenue but still robust considering the lower level of Tier 1 foundry activity. We remain very positive about the contamination control market as it continues to develop as we've predicted.

Tier 1 foundries led the adoption of automated carrier cleaning beginning at the 28-nanometer device nodes, and approximately half of last year's $84 million of CCS revenue came from Tier 1 foundries. And we've been able to see that the market will continue to expand as Tier 2 foundries follow and adopt similar cleaning strategies. Furthermore, we predicted that memory fabs would also begin to include automated carrier cleaning into their manufacturing processes, although not with the same capital intensity or carrier-cleaning frequency as logic fabs. This scenario appears to be playing out as we gained more share with the first order for an automated FOUP cleaner from a new Chinese logic fab, and we established an evaluation agreement to install our automated FOUP cleaner at a Chinese memory factory.

China is the last competitive battleground for automated FOUP cleaning, but because of the strength of our offering, coupled with the technology enhancements that we've made over the past year, we're confident in our market position and our ability to win.

We've seen a pick-up in bookings in CCS following 3 consecutive quarters of lower revenue. We anticipate growth again for the remainder of the fiscal year as we believe the foundry spending will likely increase in the second half of the year.

In addition to the CCS opportunities that are brought by current manufacturing technology, we're beginning to see the uptick in the need for the care of EUV reticles, both reticle carrier cleaning and stocking. At 7- and 5-nanometer nodes, we're positioned to expand our market as EUV technology begins to be introduced at leading-edge logic fabs. To date, we've already installed 5 EUV pod cleaners, which are operating at leading fabs that are developing EUV process technology. Cleaning specifications for EUV reticle pods is meaningfully more difficult than for FOUP cleaning, and we've been working closely with the OEM and fabs on the development of the process specification. To date, we're the only company to be production-qualified. In addition, we've delivered 5 EUV reticle stockers, which are used to store these valuable reticles in ultraclean environments. We have more of these tools in backlog, and we anticipate some acceleration of orders in the second half of 2018.

Overall, our high level of design win activity is a strong validation that the investments that we've been making in R&D are delivering capabilities and technologies that are right on the mark in terms of technical and productivity needs for 7-nanometer and 5-nanometer semiconductor manufacturing. And when these technology nodes hit high volume, we'll be ready and with even higher market share than we have today.

In the nearer term, we have many positive indicators about the market place and demand. We forecast another quarterly increase in our semiconductor business in the March quarter, with vacuum automation leading the way, and we see a reawakening in the CCS business.

All in, the December quarter was yet another important period of expanding our leadership and additional validation of our strategy and technology prowess. We've positioned ourselves for more and more profitable growth in the next quarters and years. We're beginning to hit our stride in semi, and we're investing in Life Sciences to ensure that we deliver not only on the growth opportunity in the space but also that we recognize more of the profit potential that exists in this new and exciting market.

And that concludes my formal remarks. I'll now turn the call back over to Lindon.

[Lindon Robertson, executive]

Thank you, Steve. Please refer now to the PowerPoint slides available on the Brooks website under our Investor Relations tab.

We begin with Slide 3, which is the consolidated view of our first quarter operating performance.

Our top line revenue grew 4% sequentially to $189 million. This represents growth of 18% year-over-year. Both segments drove growth. Sequentially, semiconductor solutions expanded 3% and Life Sciences, 8%. On a year-over-year basis, semiconductor grew 12%, while Life Sciences grew 42%. Inside this growth, Life Sciences had organic growth of 22% year-over-year and maintained the high organic growth trajectory we have seen for the past 5 quarters.

In the GAAP results, we see significant leverage at the operating income level on improved operating expenses. Diluted earnings per share were $0.23 in the first quarter. Let's address the primary dynamics as we look at the non-GAAP results on the right side.

Non-GAAP gross margin came in at 41%, which is a 0.5 point lower than the prior quarter. This reflects stable semiconductor margins above 42% and lower Life Science margins at 36.5%. We will cover each of these as we get to the segment pages. With total non-GAAP operating expenses essentially flat, we see 9% growth at the operating income line and healthy expansion of operating margin. If I take you back to the year-over-year comparison, this non-GAAP operating income result is up 52% year-over-year on the 18% revenue growth.

I need to spend a moment in the nonoperating section of the P&L as this is where we saw the combination of 3 dynamics uniquely impacting the sequential leverage this quarter. Some of these are temporary in terms of their impact on our earnings. First, as explained in our previous earnings call, in the first week of this quarter, we established a $200 million term loan at attractive rates. The loan currently drives $2 million of quarterly interest expense. While the interest expense will remain with us and weighs down EPS approximately $0.03 per quarter, the cash has not yet been put to work on our acquisition pipeline. But this is the primary reason we took the debt to do further acquisitions.

And as we do, we anticipate it will lift our non-GAAP earnings more than the $2 million in total and more than the $0.03 per share. And from there, it should grow.

Secondly, we experienced foreign exchange losses of $2 million in this quarter, which was $1.4 million more than the prior quarter. This is a $0.02 impact quarter-to-quarter. The FX losses were largely driven by movement in the British pound and the euro against the U.S. dollar.

We hedged our expected exposures this quarter as we always have, but saw a higher volatility in our intercompany balances relative to the hedges we put in place, which was exacerbated by funding to our U.K. operations to purchase 4titude. Generally, we have a mixture of foreign exchange gains and losses for different currencies, which often offset. However, in the December quarter, we experienced losses in nearly each instance adding up to this unusual level of impact.

While this is an exposure and cost us an extra $0.02 compared to the prior quarter, it is not expected to recur at this level. Third, the non-GAAP tax rate of 15% increased approximately 2 percentage points from 13% in the fourth quarter. The change cost us approximately $0.01 at our current level of earnings. In this case, the 15% is consistent with our expectation for the year, so we expect this impact to remain in our quarterly results going forward.

In total, these nonoperating items reduced our sequential earnings by $0.06. If foreign exchange returns to a more normal range, $0.02 of this will subside quickly. And we plan to make up more than the $0.03 of interest expense, but will take a little time as we remain disciplined in our path of acquisitions.

The joint venture earnings were flat this quarter with sustained strength in the OLED tools market. So at the bottom line, we produced $23 million of non-GAAP net income, $0.32 per share and $36.5 million in adjusted EBITDA. As noted on the chart, we see these results as being on track and progressing toward our 2019 model. Again, taking you back to the year-over-year comparison, the adjusted EBITDA of $36 million increased 42%, and non-GAAP earnings per share increased 28%.

Let's turn to Page 4 to begin discussion of the segment results. In the first quarter, Life Sciences revenue was $47.4 million, which was an increase of 8% sequentially. On a year-over-year basis, Life Sciences grew 42%, including organic growth of 22%. And this result was not an easy compare as we reported 27% organic growth at this time 1 year ago. The health of the past 1- and 2-year track -- growth track for Life Sciences is seen across our entire portfolio. System sales have been -- have seen strong growth driven by the need for automated infrastructure to manage biological samples in the cryogenic environment.

Consumables and instruments growth is driven by the adoption of Brooks technologies to enhance and enable advanced workflow of sample management solutions. We see this expanding with both our Automation and BioStorage customers. Further, our services and informatics business continues to expand on our BioStorage platform, coupled with expanded software offerings for both small labs and enterprise solutions. All of these areas have seen high double-digit growth over the past year.

On a sequential basis, Life Science revenue, which was up $3.5 million, had 2 lines of significant growth compared to the fourth quarter. The 4titude acquisition added $3.4 million. And Genomic Services, a seasonal driver inside storage services for December, expanded $2.8 million. These increases were partially offset in 2 other areas. Transportation service was $1.3 million lower, and sales in our cryo products achieved $1 million in the quarter, down $1.3 million from the fourth quarter. The remaining lines were stable sequentially.

The total bookings for Life Sciences picked up again in the first quarter, coming in at $59 million and adding to backlog. I should emphasize that our Life Sciences bookings are a mix of short-term and long-term estimated realizable revenue. So similar to our comments last quarter, while this is a strong showing of demand, it does not translate meaningfully into a book-to-bill ratio indicator.

Life Sciences adjusted gross margin in the first quarter came in at 36.5%, down 170 basis points in total from the prior quarter. Margins in the infrastructure sales and services area improved 160 basis points sequentially but the improvement was a bit short of the progress we had anticipated. This level of improvement was offset by the mix impact of the higher Genomic Services, which carry lower margins. Also, the lower transportation in the December quarter left the fixed cost of our fleet underutilized.

In regards to this current second quarter, we see revenue growth overcoming the seasonal drop of Genomic Services and reaching a range of $48 million to $50 million. Gross margins will benefit from further cost improvements and the improved mix. As Steve highlighted, we expect Life Sciences to be at 10% operating income by the fourth quarter. In terms of cost and expense structure, except for the potential of further acquisitions, we believe our investments for this year are largely in place now, and we continuously lean out all areas of our business. The revenue growth, cost improvements, favorable mix and leverage provide the road map to get to 10%.

Let's turn now to the Semiconductor business on Slide 5. Semiconductor Solutions revenue increased 3% compared to the fourth quarter. As Steve shared, our automation offerings, which include robots and systems, was the principal driver of this increase. We continue to experience strong demand in advanced packaging as well as in deposition and etch applications. As anticipated, we did see softness in Contamination Control Solutions this quarter and are seeing the indication of higher demand coming back by the second half of our fiscal year. In total, the $142 million of revenue is 12% higher than 1 year earlier. The Semiconductor adjusted gross margin was essentially flat this quarter at 42.3%, and operating expenses improved largely on reduced variable compensation accruals in this first fiscal quarter.

The operating margins of 19% are running at the high end of our target model and give us continued confidence in delivering on our 2019 model.

Now let's turn to the balance sheet on Page 6. As previously referenced, we established the first debt instrument for Brooks in many years. It was the right time to take on the debt as it ensured our liquidity as we acquired the 4titude business and provides fuel for a robust M&A pipeline ahead of us.

I draw your attention to the working capital line and highlight that our receivables were largely affected by timing of sales, which we would expect to moderate in future quarters. The addition to inventory is driven by both segments, split between ensuring the supply chain of semiconductor product and the expansion of growth in Life Sciences.

Let's now turn to Slide 7. Our first fiscal quarter inherently provides lower cash flow as this is the quarter we pay out our annual variable compensation from the prior year results. With that payout and the investment in working capital behind us, I believe the $3 million is a strong start and provides promise of strong cash flow ahead of us. In the area of investments, you can observe the $65 million we used for the acquisition of 4titude. You can also see our commitment to the dividend payment. We started paying the dividend in 2011 and have since returned $160 million in dividends to shareholders.

Let's turn it over to Slide 8. Before we wrap up and discuss our guidance, let me first summarize our results and provide commentary on the impact of tax reform. In the first quarter, 4% sequential top line growth drove operating margin expansion. Both operating income and bottom line earnings per share are much stronger than 1 year ago, and our profit model is still progressing. In this past quarter, we saw our first quarter of interest expense in our new debt, and we experienced an unusual level of foreign exchange losses, which, in total, dampened the sequential model -- momentum at the EPS level.

The interest expense will stay with us in future quarters but the FX impact should not. And as we make further acquisitions, we expect the interest expense to be more than covered by the operating income of the businesses we acquire.

Combining those potential acquisitions with the continued growth we are seeing in each segment, and with the path for profit improvement in Life Sciences, and I think you can see why we are in a strong position for future profitable growth and have confidence in our 2019 model.

The tax reform will also help us in the future. As most of you understand, we have nearly $100 million in net operating losses, which we carry forward from the past. These provide tax credits that can be used against U.S. tax obligations for some time to come. So here are the key points of effect on us.

For now, we will see approximately 15% as the global tax rate since our U.S. taxes will be near 0 as long as we have the NOLs and as long as they are fully reserved. Behind this dynamic, our incremental 2018 U.S. tax liabilities will be calculated at a blended rate for this December quarter at 35% and the Q2 through Q4 periods at 21%. This will be 24.5% for 2018. But even this will be lower than the future as more than half of our U.S. income is driven by exports. Profit from U.S. exports will benefit from a lower rate in our 2019 fiscal year.

In the future, if we were to exclude the impact of reserved NOLs, we would expect our global tax rate to be approximately 20% to 25%, which reflects the U.S. at approximately 17%. The global rate is approximately 10 points lower than our past experience.

For now it is important to note, we continue to operate with a fully reserved NOLs, which provide U.S. tax credits for some time to come.

So now for the guidance of our second fiscal quarter. Revenue is expected to be in the range of $195 million to $205 million. Adjusted EBITDA is anticipated to be $39 million to $46 million, non-GAAP earnings per share expected to be $0.33 to $0.41 per share, and the GAAP earnings per share is expected to come in at $0.24 to $0.32.

That concludes our remarks. I'll now turn the call back over to Christopher to take questions from the line.

[Operator]

[Operator Instructions] And our first question comes from the line of William March with Janney Montgomery Scott.

[William March, analyst]

So first question, could you give update on 4titude and Pacific-Bio following the integration, what you've seen since they've been integrated? And then in conjunction with that, Steve, can you maybe talk about the M&A pipeline? And as you think about adding a consumable versus a software versus sample storage, kind of, how you're ranking potential acquisitions?

[Stephen Schwartz, executive]

Sure. Bill, so a couple of things, about the acquisitions, we -- when we took on the 4titude group, we anticipated around $3 million and change and they delivered exactly that. Their outlook for Q2 is equally strong, maybe up a little bit. So they're right on schedule, right on track and fitting in extremely well. The integration activity Dusty has going on with the team are progressing really well, and it's been a smooth integration so far. And we're really positive about how the outlook is. In the PBMMI acquisition, we were pretty secure on the storage business. It turns out in the September quarter, we were right on track. In December, we were up a little bit. It was a pleasant surprise. The summer period for transport services we know to be high, and we found out in December, it dropped to about $1 million from the September quarter, again, anticipated. But that progress is going extremely well. And I'd say from our outlook, the storage is a little bit higher than we'd anticipated. So they seem to be integrating without skipping a beat, and Dusty's team is all around it and the teams are integrating really well. So we're really pleased. So those 2 have gone well. And when we look at the pipeline, obviously, we're interested in continuing to add the high-quality samples and capability in the pipeline. So we'll always look for additional biobanking opportunities there. From informatics platform, we have really strong capabilities that exist. And when we evaluate the capabilities from an informatics standpoint, that's usually a make versus buy. We have a really capable team, but there are some capabilities we'd like to add. But right now, the progress we made with some large customers gives us high confidence that we're on a really good path. We continue to look at the analysis capabilities. We think we're pretty secure from a hardware standpoint. And there are some other transport capabilities that we're in the process of make-versus-buy decisions because we do think that expanding our cryogenic cold chain beyond what goes on inside the facility or the factory that includes transport also is a meaningful capability to add. But there are a lot of opportunities, there are a lot of options, we're weighing all those carefully. So we do have a very rich pipeline. And I would -- it's hard to comment on any of it specifically, but for -- certainly in 2018, we would imagine we'll continue to be active. And as Lindon mentioned, we have some dry powder and it wraps around the size of the acquisition we're looking at pretty well.

[William March, analyst]

Got it. And then maybe, Lindon, just talking about the Life Science outlook and reaching that 10% margin by the fourth quarter, gross margins expanded rough -- almost 100 basis points year-over-year on what sequentially -- or what is the lowest seasonally. Kind of how do we get from the low single-digit margin to 10%? Is that going to come more from gross margin? Is that operating cost coming out? Just help us walk through that bridge.

[Lindon Robertson, executive]

Yes, that's good, Bill. Yes, so at 36.5% on gross margin, we've been saying that we'll execute to above 40% on average for this year. And so you can see that's a solid 5-point improvement there. And we need 7 points to get from 3% to 10%. And so I think, one, as we continue to lean out cost and expense, that's going to help with the gross margin, a little bit on operating expense. But then the rest will come through leverage. As we said, our current investments, we think, sustain the current business the way it is and will gain the benefit of the revenue growth. So we're confident. We're actually excited about the path, and it puts us right on a trajectory as well for the 2019 model that we've discussed to be in the 42 % to 44% gross margin range and at a 15% operating margin. So it looks good to us.

[Operator]

And our next question comes from the line of Edwin Mok with Needham & Company.

[Y. Edwin Mok, analyst]

So let me stay with Life Sciences first. I remember last quarter you guys guided for $47 million to $49 million, you're at $47 million. Was the $1 million difference from the midpoint just from this transport that was a little lower than expected?

[Lindon Robertson, executive]

It never comes out exactly as you said, that's when we range it. We hit $47.4 million, so it's less than $1 million difference and we're in the range. I think the transport drop, it surprised us a little bit on the magnitude of it. But Edwin, I think overall, we're pretty pleased with the mix and the stability. And we don't get -- honestly, we don't get too hung up on the quarter-to-quarter, although we press hard to get it every quarter. But the substance of the growth year-over-year and the pipeline and the bookings we had this quarter, the interest and the demand that we're seeing gives us a lot of confidence that, well, we executed in the range and we're on the track that we need for the year.

[Y. Edwin Mok, analyst]

Okay, great. That's helpful color. And can you kind of help us resolve, tell us how much of your business come -- is now coming from recurring versus like store sales? And I know you guys have a very nice booking quarter. It sounds like booking is rebounding really strong in this quarter. How much of that is coming from large contract from this recurring business, recurring revenue business?

[Lindon Robertson, executive]

Yes. So we -- it continues to range in the -- above the 50% level. We update it at the end of the year. It was 53% this past year and we're in that similar range right now. I don't think it's that productive to go quarter-by-quarter. By the way, it would tweak down modestly but still above the 50% level, and the reason it tweaks down is because we see the spike in Genomics and we don't count that service as recurring. But I'd say it's steady as it goes, 53% from last year. If it moves dramatically, we'll update the Street.

[Stephen Schwartz, executive]

Edwin, also the storage business has been pretty strong. So the infrastructure is growing so that we knew what the sample business looks like, which has been great, but the storage business has been particularly strong.

[Y. Edwin Mok, analyst]

Okay, that's helpful. On the -- Steve, on your comments around new store customer, you mentioned the large hospital that you guys have secured. Did I understand correctly that you guys are building a new facility next to that hospital? Or is that -- did I misunderstand that comment?

[Stephen Schwartz, executive]

Yes, so there's a large research hospital. And as we're able to name it, we will, but a little bit premature right now. But we were under agreement to -- literally to build a facility very close to -- on the premises of this large research hospital, pretty well known, and literally to take the sample collection that are distributed all around this facility into a central repository and run it as we do as Brooks Bio Storage. And I think that's what the customer is looking for, that order, that ability to manage, that specificity of purpose and care of samples. And so within a year, we'll be largely on the way to having that facility up and running. And it's a real testament, we think, to the capability that they see. And it's a really good size collection, large enough to justify its own facility and they're keen to have it close by. We think we could serve them from the locations that we have, but we're also delighted to have a chance at this opportunity and putting it close by the customer, and it is literally more of our capability in yet another location and quite large enough to justify the facility from a single customer. And we anticipate this won't be the last time we do something like this.

[Y. Edwin Mok, analyst]

Yes, so I was going to say, it seems like you -- potentially a new business opportunity for you guys. I mean, I imagine some of your customers that are historically might be buying this storage will look at the kind of cost analysis in terms of having you manage it versus them managing themselves. Do you see this as potentially a new growth vector for the company long-- obviously longer term, not today, but longer term?

[Stephen Schwartz, executive]

Edward, sorry, if you could just -- one more time?

[Y. Edwin Mok, analyst]

Yes, I mean, just basically, as I was looking at this, right, is this an example of potentially a new growth vector for you guys in terms of the opportunity of building storage facilities for your customer that historically might be buying -- just buying equipment themselves or try to buy storage themselves?

[Stephen Schwartz, executive]

Yes, so we anticipate some customers will do this. I think, Edwin, what will happen is when the word spreads that a facility like this was able to satisfy their sample needs with the capability that we put in place, we anticipate that it will provide more of a business opportunity. That said, customers who've been our customers for a while are quite content that the samples can be located in Indianapolis or in Darmstadt or in Singapore, that they can retrieve them quickly, that they can archive them quickly, and so we'll see differences here. But we fully understand that some customers want to make sure that they have not just proximity but can -- able to look at and view where their samples are. So we would anticipate they'll be both. But I think that this will be a sign to some customers who are still contemplating outsourcing the management of samples that when they see a dedicated facility serving sites particularly well, that it indeed might be a new business opportunity for us.

[Y. Edwin Mok, analyst]

Very interesting. I have a question on just quickly one question on the semi side. One of your large customers -- or one of your large front-end equipment customer that sell into etch and dep space, right, talked about second half more, like, flattish to the first half of this year. But you sounded more optimistic about growth on your business in the second half. Is there a way to, kind of, think about the difference? Is it because of CCS ramping in the second half? Or any other color you can provide on that.

[Stephen Schwartz, executive]

Yes, Edwin, we -- it's a good question. I'll just put the part in perspective because you hit it exactly on the head. Our CCS business at $14 million was down $10 million from a year ago, same quarter. But the rest of our business has grown significantly. So if and as the Tier 1 foundries begin to do more spending in the second half, that will provide an additional opportunity for us. That's kind of how we look at it. So we'll -- the business that we still serve to Tier 1 OEMs will be -- will go exactly as they go. But there is a bit of difference on the make-up of the fab just because of the propensity that they have to use more of the CCS product.

[Operator]

Our next question comes from the line of Farhan Ahmad with Crédit Suisse.

[Darren Chen, analyst]

This is Darren on for Farhan. Just first question is about your operating margin mix. So I see that you have 19% this quarter. Can you provide some guidance on how you see that moving forward throughout the year?

[Lindon Robertson, executive]

Sorry, guidance on how we what?

[Darren Chen, analyst]

How you think about the semiconductor business margin, operating margin moving forward. Do you think you can...

[Lindon Robertson, executive]

Oh, I see. So we only guide semi on a revenue basis for the current quarter. We've not broken into such confidence that we're out of cycles in semi that we wouldn't point to one. But in 2019, we give you a model that we're tracking forward. So in 2019, we've described that it would be 16% to 19% operating margin. And that's why I clarified that we're already operating at the high level of those operating margins, and it gives us increased confidence that we'll be well on top of that model and perhaps even a little stronger if the CapEx equation in semi continues to show strength.

[Darren Chen, analyst]

Okay, yes, that's what I was getting at, was just I kind of understand that guidance that you gave is going to be towards the top half because you guys are already, kind of, there. And then with regards to sort of the EUV aspect that you guys mentioned, can you provide some further color on how the sort of the time line of how that will impact your semiconductor business moving forward? I know you have 5 tools that you said that were already, kind of, in place. But what do you look at -- where do you think about that heading forward?

[Stephen Schwartz, executive]

Listen, Darren, we put tools in now over the past few years. And the question that we have is how many -- what will be the density of our tools with the reticle cleaners and the reticle storage systems when customers add additional EUV tools. So we have some products in the backlog. We anticipate we may have a couple of new customers this year. The thing that we can't gauge yet and we have not put into our own projection are if there's a lineup of a number of EUV tools, how many of the reticle support tools will be part of that infrastructure. It's something we just don't know yet. As we know we'll inform, but we can imagine -- we would not imagine to have a single dedicated EUV FOUP cleaner or EUV stocker for large numbers of EUV tools. We would imagine that the ratio will be more favorable.

[Operator]

[Operator Instructions] And our next question comes from the line of Patrick Ho with Stifel.

[Patrick Ho, analyst]

Steve, maybe first off on the semiconductor side of things. I know you've talked about potential expansion of the CCS business to the memory makers. Do you believe that transition or the inflection point may be when the industry gets to 96 layers on the 3D NAND side of things? Or I guess what's with the catalyst that's going to be needed for adoption by the memory players?

[Stephen Schwartz, executive]

So it's a question that we still wonder. We certainly know that -- well, I'll give you an example. Of the tools that we ship in the quarter about a dozen, half were for memory and half were for logic. So that's the biggest ratio we've had. And it was to a number of different memory makers. What we would anticipate, Patrick, as the chemistries change, so it may be related to layers, it may be related to the complexity of the etch technology, we think as the chemistries change, likely, that may require more FOUP cleaning, but that's an unknown for us right now. So there's some level of cleaning and it'll certainly be also volume driven, but there's not a catalyst right now that, as a particular technology, is driving a higher density of FOUP cleaning. But again these are early days for us.

[Patrick Ho, analyst]

Great, that's helpful. And maybe as my follow-up question for Lindon, in terms of the investments that are still needed on the Life Sciences, and you're setting the target of 10% operating margins for the September quarter. Yet as you're starting to grow revenues and they're starting to ramp that probably more investments are going to be needed both for supporting these customers, especially some of the new ones you highlighted in your prepared remarks. How do you balance, I guess, some of these new investments versus your target of getting to that 10% target goal you set?

[Lindon Robertson, executive]

I appreciate the question. I want to clarify, we've been bullish on this market for the past 5 years, and we've been putting the investment in place. And as we've acquired business, it has been exactly as you just described. We would put additional investment in place but we would also take some cost out as we integrated acquisitions. And so that's been our mode to this point. And what we've highlighted here today is that we feel like our organic investment or the investment needed to support the businesses that we own today is largely in place. And so we think the rest of this year will benefit from what's in our structure today, and it will be very modest, if any, changes in any additions. But meanwhile we'll also continue to work out and lean out our business, and we think we're -- specifically, we think we have some cost improvements to make on the storage and infrastructure side of the business. But we're pretty happy with the structure we have. We added a little headcount this past quarter. You'll see that in the expense line. And I think from this 3% operating margin, we're going to see the benefit of revenue growth and it's already supported with what we have on hand.

[Operator]

And our next question comes from the line of Drew Jones with Stephens.

[Andrew Jones, analyst]

Kind of piggybacking off of that last question, can you give us an update or reminder on where the Life Sciences sales force is at this point, and maybe the average Brooks tenure there?

[Stephen Schwartz, executive]

Gosh, it'll be a guess because we've acquired and hired, but the average tenure from the companies, I would -- well, it'd be really hard for us, but we're now 6 or 7 years in the business but we have just over 100 salespeople in the company right now. And all of them, whether they've been with Brooks or not, they're generally pretty experienced sales people in and around Life Sciences. So we are -- we're not yet at a place where we're hiring and training brand-new people. There are a lot of -- I have to say, and we've been really pleased about it, we've had a lot of really talented people eager to join the company, and they generally come from consumables space, from capital equipment space, from cryo in and around the space. So I think it's a really experienced sales organization. The things that we're learning and developing are really about selling the portfolio of capabilities that we have and offering solutions to customers, and generally, we think really solid from that standpoint. But we're 100 - we're about 105 salespeople, up 50% from 1 year ago, Drew.

[Andrew Jones, analyst]

Perfect. And then, Steve, can you give us an update on that large Beijing customer that you called out last quarter, just where they are in their ramp?

[Stephen Schwartz, executive]

Sure. We are in the process of manufacturing those tools. We anticipate the installation will be late in this year, early next year, just to stay on their timing actually, but we'll be quite ready. But 3 large stores and they have -- I'll remind you, they have 8 of the large automated cryo stores. So it's a large customer and we are in with cryo and on the large automated BioStores, those are on track for about 1 year from now for delivery.

[Operator]

And our next question comes from the line of Craig Ellis with B. Riley.

[Craig Ellis, analyst]

I just wanted to start going back to Life Sciences. I think the operating margin target makes a ton of sense and very logical path to get there about equally between what you want to do with gross margins and optimizations along with volume. The question is, given that you intend to be acquisitive, how should we think about acquisition impact to the 10% operating margin goal? Would we expect that it would be retained through acquisitions or revisit the timing of 10% operating margin attainment once we potentially add another business or even 2 under what you have now in Life Sciences?

[Lindon Robertson, executive]

Craig, this is really good because this is really central to what we've been doing on a regular basis. So when we acquire, a couple of things happen. One, we're very focused on how fast it becomes accretive. Happy to say PBMMI became accretive immediately, 4titude was accretive immediately, both on a non-GAAP basis. And our past acquisitions have either been immediate or very soon after. What we do find is it's not always at the level of, what I would say, a steady state. And as we expand this business and then as we integrate -- because they're carrying the infrastructure that they needed, and as we integrate we're able to expand those margins. So we would anticipate that as we acquire another business, it takes somewhere between 1 to 2 quarters, sometimes if it's a larger business, it may take a little longer time to get to a run rate of where we're going to keep the business. But I'd say that's the right expectation, probably 2 quarters on average. And so while it might pull the margin down, I expect it's going to be fully accretive. So you take the business that we own today, expect 10% on it and then add dollars to that and whether it pulls it down from 10% or helps it stay at or better than 10% remains to be seen depending on the timing of the acquisition.

[Craig Ellis, analyst]

And that's helpful color, Lindon. I'll turn it to the semi business and to go back to some of the intermediate term comments that Steve had. Steve, given the inflection that it seems like we'll start to see in CCS in the relatively near future and with a stronger second half based on foundry, and steadier growth in advanced packaging and some of the other growth areas, are there any meaningful negatives that we would see in the back half of the year in the legacy portfolio? Because it seems the semi business is set up not only for good sequential growth through the year but for accelerating year-on-year growth given last year's profile.

[Stephen Schwartz, executive]

Yes, it's a good question and unknown to us. I'll remind you, Craig, I think you're pretty familiar, but the cryo business, the cryo vacuum business just generally implants in PVD. So if that's sustained, that will remain a strong business for us. We do have legacy tools and we serve a lot of 200-millimeter business that happens to be driven by, right now, the Internet of Things. I mean a lot of -- there's a lot of 200-millimeter capacity that's sustained at a pretty healthy level for 4 to 8 quarters now. Anything could happen there but the level has been pretty strong. And I think it's just because of the overall robust environment, but those are unknown to us and difficult for us to forecast. But right now, those feel also like they're -- they ought to sustain through the year. The one area that's always been a little bit of a wildcard for us is -- I'll remind you we have a strong -- we have strong OEM customers in Korea who sells predominantly in Korea, so that goes up and down based on the spending in Korea. And so that's one area that could fluctuate. So if there's a Samsung, Hynix slowdown of any kind, sometimes we see that business slow down very quickly because they are -- they really are relegated to the business in Korea. We are, however, developing a pretty meaningful OEM customer base in China. And the same kind of dynamic is set up where, as long as the factory activity expands, that will be really good business for us. But they don't have a lot of business outside of China, and if the Chinese fabs don't continue to materialize, that business could slow down. But those are the -- that's how we look at the business. Those are the things we really pay attention to from an outlook standpoint. And anything else that -- of course, anything that impacts the industry generally impacts us, but we do have some unique segments that don't move generally with the industry, that being the CCS related to foundry and the OEM business in Korea and now in China.

[Craig Ellis, analyst]

That's helpful. And then just following up on the China comment, Steve, there's a lot of focus on the region topically for understandable reasons. Can you just go a little bit further out and talk about where you see Brooks now with the engagements that you have and business that is coming in? And what would be possible for Brooks, not quantitatively but qualitatively, if we look ahead to the 2019 and 2020 time frame based on some of the engagements that your salespeople would be having now?

[Stephen Schwartz, executive]

Well, we have more than 50 customers in China for the -- and we're talking about semi now, for the semi business. And we support about 15 different OEMs. And our understanding and our observation actually is that it appears as though some of the newer and less mature equipment makers are certainly getting a very serious look at some of the technologies that they can serve. So they may not be getting the most critical etch or dep applications but some of the rather straightforward or mundane or simpler process technologies, they'll likely have an outsized share of that business. And that is very meaningful for us because we have extremely high share, especially around the vacuum automation and high share on the cryogenic pumps in China, and so their unfair share would translate into really good share position for us. Chinese factories by Chinese companies would certainly drive the business.

[Operator]

There are no further questions at this time. I will now turn the call back to the presenters. Please continue with your presentation or closing remarks.

[Lindon Robertson, executive]

Christopher, thanks very much. Look, we really appreciate everyone's time with us and your interest in Brooks. We're really excited about the environment around both of our segments, and we're gaining even greater confidence for the path that we're heading not just for this year but in 2019 on the model that we've outlined. And we look forward to keeping you up-to-date on that. We look forward to talking to you again this time next quarter. Thank you.

[Operator]

Ladies and gentlemen that does conclude the conference call for today. We thank you for your presentation and ask that you please disconnect your line.