Azenta Inc

NASDAQ:AZTA

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Q2 2018 Financial Results Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, May 1, 2018.

And now I would like to turn the conference over to Lindon Robertson, Executive Vice President and CFO. Please go ahead.

[Lindon Robertson, executive]

Thank you, Scott, and good afternoon, everyone. We would like to welcome each of you to the second quarter financial results conference call for the Brooks fiscal year 2018. We will be covering the results of the second quarter ended on March 31, and then we will provide an outlook for this current fiscal quarter ending June 30, 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 second quarter highlights, then we'll provide an overview of the second quarter financial results and a summary of our financial outlook for the quarter ending June 30, which is our third quarter of the fiscal year 2018. We'll then take your 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'd 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 another strong quarter.

In our Q2, growth and increased profitability remained the themes with revenue of $207 million, up 9% from the December quarter and 22% from last year. EPS increased to $0.40 per share, and bookings in the quarter were $238 million with semiconductor contributing $184 million and life sciences again above $50 million at $54 million. We forecast more growth ahead. And as you'll hear from us today, innovation new product development and value-added acquisitions continue to be fuel that's accelerating our success.

Although the stock markets have been volatile of late due to the uncertainty in the semiconductor supply chain, we could not be more secure in our strategy. We're gaining share with the strongest players in the market and in technology sectors, where we add high value.

In Semiconductors, artificial intelligence, cloud computing, Big Data initiatives and 5G are technologies that are driving the tremendous semiconductor storage and computational needs of the data economy. It's a breadth of applications that include memory and logic that are propelling an expansion in capacity and a new threshold in wafer fab equipment spending that's unprecedented and may indeed be sustained.

We're bullish about the long-term drivers in the semiconductor industry, and we believe our critical technologies are proving to be enabling the necessary capabilities for OEMs and end users, who will lead in these markets.

Similarly, in Life Sciences, we are seeing the steady increase in our opportunity related to sample management and measurement, as high-quality biological samples are the keys to cures for the most serious diseases facing human race. We believe this market will continue to expand for the foreseeable future.

In the midst of these opportunities, our focus remains value delivery and value capture in both of our end markets. And I'll use my prepared comments to give you an update on our performance in each of these sectors.

First, for Life Sciences. Life Sciences revenue came in at $49 million, up 40% from 1 year ago. BioStorage was up 46%, and other products, including automation and consumables and instruments, contributed 34%, representing strong growth across the portfolio of offerings. Organic growth was 28% for BioStorage services and 16% overall. Bookings of $54 million gave us the best 2 consecutive quarter bookings in our history. Our pipeline remains robust, and we're confident about our forecast for greater than 30% growth this year.

In the quarter, we added 32 new customers across a broad spectrum of biotech, pharma, clinical, consumer and academic and government customers. Notable among our wins, we received a multiyear, multimillion-dollar sample management contract to support a U.K.-based study for a major well-funded life sciences company. The scope of our work includes storage, handling and transport as well as laboratory services that we'll be providing out of our European sample hub in Germany. Cumulatively, we've received more than $30 million in bookings, since establishing this strategic relationship. And in the quarter, we added 22 new customers for a wide range of cold chain consumables and instruments, including FluidX tubes, 4titude plates and filling and capping products.

And last week, we announced the acquisition of another biorepository business, BioSpeciMan. A small Canada-based company with storage facilities in Montréal and Pennsylvania. BioSpeciMan is a high-quality biorepository with first-class sample management standards and is a good fit with our BioStorage operations. The natural addition of more samples under management, it adds to our customer base, and it gives us strong presence in the Canadian market, where we believe there's more opportunity for expansion of our services. Integration activities are already underway, and we anticipate the financial results from this acquisition will be accretive immediately in the June quarter.

You should anticipate that we will continue to deploy capital to build our offerings in support of the sample management cold chain, as we have a robust pipeline of potential acquisition targets of varying sizes.

As I mentioned on our last call, we have established an operation that's of a size and capability that can be leveraged to add revenue without significant additional costs. We're on a trajectory for greater than 30% growth this year, and we're also committed to delivering more profitability from this business. Toward that end, operating profit in the quarter increased to $3 million or 6%, more than doubling our Q1 performance and giving us strong momentum and high confidence to deliver 10% operating income in the September quarter.

For the June quarter, we forecast more growth with revenue reaching $50 million and further expansion of operating margin. It's easy to be enthusiastic about this business and the enormous potential value it brings to our shareholders.

And now for a look at our Semiconductor business, which continues to perform at a high level. Revenue in our Semiconductor segment came in at $159 million, up 12% sequentially from the December quarter and 18% over the same quarter 1 year ago, and that's in spite of $9 million less in CCS revenue, that's a result of lower foundry spending. And bookings of $184 million, bring Semiconductor orders for the first half of our fiscal 2018 to $350 million, an indicator supporting our expectations for another robust year in semi-capital equipment spending.

What might be most impressive is that the quarter, we notched 28 new design wins across our semiconductor product portfolio. None of us can remember a quarter like this when so much engineering and design work resulted in so many important new orders. But we have the engineering and operational capability to adapt to these new product demands, and we look forward to when volume orders for these products are expected to increase next year. This strong showing is the result of our superior technology capability, and the close interdependent relationships that we forge with our customers, both OEMs and end users. I'll give some color into our key semiconductor segments beginning with some commentary about vacuum automation.

In Q2, we continued to see strong growth in our automation business. Our vacuum automation business represents approximately 1/3 of our semiconductor revenue, with most of the revenue coming from deposition and etch process technologies, which includes some packaging applications.

In the quarter, our total vacuum automation business grew 18% from the December quarter, and 29% year-over-year, with the contribution from vacuum systems, slightly outgrowing vacuum robots.

As we indicated before, vacuum systems are enabling tools for Tier 2 OEMs, who purchase process-chamber-ready automation platforms from us with the knowledge and trust that they will receive a system that will be readily accepted into a semiconductor fab.

Over the years, we've been building a meaningful vacuum systems business with many Korean and Chinese OEMs. We believe that these wins are important from a market share standpoint, as these Asian OEMs are often advantaged, when Korean and Chinese companies build fabs. And since the revenue we receive for each vacuum system is typically 3x to 5x the revenue we would get if we sold only a vacuum robot, the benefit from Tier-2 equipment makers is meaningful. In Q2, revenue from vacuum systems sold to Korean and Chinese OEMs was just shy of 10% of our Semiconductor product revenue.

Meanwhile, we've continued to cement our long-term relationships with Tier-1 OEMs, where volumes are much higher. And in the quarter, we had 3 new vacuum automation design wins, including a new win for our Mag LEAP robot on another Tier-1 OEM platform. Our forecast for automation product revenue is to increase again in the June quarter, with record performance, once again, in vacuum robots and vacuum systems.

Advanced packaging revenue in the quarter was $11 million, down from $15 million in the December quarter, bringing us $26 million in the first half revenue, compared with $43 million for all of fiscal 2017. We had 4 new design wins in the quarter, and we continue to capture share of this new market.

As I mentioned in the past, this market segment is still difficult to forecast, but because of our design win activity, we're well positioned for any advanced packaging capacity increases.

Finally, we have very active quarter in our Contamination Control Solutions business in terms of new business activity. As we forecasted in the quarter, we began to see a pickup in CCS with revenue climbing 15% quarter-over-quarter to $16 million, but still down more than 30% from the same quarter 1 year ago due to reduced foundry spending. That said, we're encouraged by the breadth of customers we're developing for CCS products as we had a record 11 new CCS design wins in the quarter, including tools for 6 different new fab customers in China, doubling our number of China CCS customers to 12. Additionally, 3 of the 11 design wins were for new memory customers: 2 for NAND and 1 for DRAM, bringing the number of memory fabs we penetrated to 10. Overall, the CCS market is developing as we forecasted, with the expansion beyond Tier-1 foundry coming for advanced memory fabs and new fabs in China.

Just after the end of March quarter, we announced the acquisition of Tec-Sem, a Swiss company with a long history and respected market position in the management of reticles that support the lithography steps in chip manufacturing. Think of a reticle as a photographic negative that's used to print an image on a silicone wafer. Tec-Sem has a strong reputation and an A-list of fab customers around the world, who depend on their solid designs and reliable systems to store and protect their valuable collections of reticles. Tec-Sem's products are in many ways complementary to the technologies we have in our CCS operations. Our CCS product portfolio includes tools that clean and decontaminate the carriers that are used to move wafers and reticles in a fab. Tec-Sem gives us reticle storage systems or stalkers that offer high-density reticle storage and protection to these multimillion mask sets.

We anticipate that with the expansion of EUV lithography as a critical technology and the increased value that must be placed on protecting and extending the life of the very expensive EUV reticles, there'll be an opportunity for our combined engineering teams to bring high-value reticle protection systems to bear on the burgeoning EUV ecosystem. The synergy opportunities between our CCS business and Tec-Sem are significant, and we've combined these groups together into our CCS business unit.

Four years ago, we entered the contamination control business at a time when we could feel that it was set to take off. And indeed, CCS revenue tripled in our first 3 years of ownership. Today, we have a similar feeling about an inflection in terms of the need for next generation of reticle management capabilities that are needed by our customers. The opportunity will be driven by needs beyond conventional reticle management, but especially for enabling capabilities surrounding and supporting EUV lithography.

In the June quarter, we're forecasting an increase in our CCS business to approximately $23 million, as foundry spending begins to percolate per capacity expansions in existing factories. Included in our forecast are the first installations of automated carrier cleaners for 5-nanometer qualification.

Overall, we're particularly pleased with the performance of our Semiconductor business. Our exceptional design win quarter is a testament to our capabilities, and that our strategic R&D investments for innovative new products are the mark of what our customers are looking for to meet their requirements for 7- and 5-nanometer technology deliverables.

We'll ride the wave of strong order demand ending the June quarter, and we anticipate that our Semiconductor segment revenue will increase by approximately $10 million in the quarter.

In total, our second quarter performance was very strong, as demonstrated by our revenue growth and the additional design wins that we secured. And we're enthusiastic about our prospects for the future. In the June quarter, we look to demonstrate more results from our strong market positions with growth in both Semiconductor and Life Sciences.

And that concludes my formal remarks. I'll 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 a consolidated view of our second quarter operating performance.

Our top line revenue grew 9% sequentially to reach $207 million. This brings us up to 22% growth year-over-year compared to the second quarter last year. Both segments drove the growth. Sequentially, Semiconductor Solutions expanded 12%, and Life Sciences expanded for the 11th consecutive quarter with 2% growth. On a year-over-year basis, Semiconductor grew 18% while Life Sciences increased 40%.

In the GAAP results, diluted earnings per share came in at $0.95 in the second quarter. We had $46 million of benefit on the bottom line from reversing the valuation allowance reserve, which had been recorded against our deferred tax assets in the U.S. in our 2016 fiscal year. I fully acknowledge that this change in reserves provides more of an optics change than an economic earnings event in the quarter. However, I want to highlight the underlying drivers in determining the release of the reserve.

First, a reflexive turnaround in the cumulative profit results in the U.S. over recent years versus the cumulative loss position that company had accumulated in the years leading up to the reserve being booked in 2016. Second, a reflux confidence in our outlook to generate U.S. profits going forward in our ability to utilize the deferred tax assets. Finally, I will share that we arrived at this conclusion prior to applying impacts of the U.S. tax reform and then gained further confidence after considering the potential impacts of the tax reform.

Now let's address the primary dynamics of the P&L, as we look at the non-GAAP results on the right side of the page.

Non-GAAP gross margin came in above 41% and up approximately 30 basis points compared to the prior quarter. Improvement was driven by Life Science margins, which increased to approximately 40% in this quarter, consistent with our projections for improvement provided last quarter. I will say more on the segments in the upcoming slides.

SG&A expanded on a sequential increase of variable compensation accruals and some professional services expense. But you can see this was less than the revenue growth providing further margin expansion at the operating income line. Operating income was $32 million, an increase of $4 million or 14%, sequentially.

We saw additional improvement in the nonoperating section of the P&L. Net interest expense was reduced modestly with interest income derived from conservative investments. Foreign exchange losses were $1.5 million less than the prior quarter, and our tax rate was adjusted downward due to a change in the jurisdictional mix of income. In this quarter, we had a non-GAAP tax rate of 10%, and we foresee an approximate tax rate of 13% for the balance of the year.

Partially offsetting the improvements was an $800,000 decline in the joint venture earnings in Japan, consistent with projections of software capital spending in the OLED market. In total, we expanded the operating income margin 70 basis points and net income margin by 180 basis points. Earnings per share increased 26% compared to the prior quarter and was 42% above the EPS from second quarter 2017.

Let's turn to Page 4 to begin discussion of the segment results. In the second quarter, Life Sciences revenue was $49 million, an increase of 2% sequentially. On a year-over-year basis, Life Sciences grew 40%, including the organic growth of 16%. The growth was well supported on both sides: in storage services and in storage product offerings. The 2% sequential growth reflects 8% expansion across the business, except for genomic services, which has a seasonal spike in December and declines in the March quarter.

The total bookings for Life Sciences came in at $54 million and added to our backlog. I should, once again, emphasize that our Life Science bookings are a mix of short-term and long-term estimated realizable revenue. So similar to our comments last quarter, while this continues to show strong demand, it does not translate meaningfully into our book-to-bill ratio indicator.

Life Sciences' adjusted gross margin in the second quarter came in at 39.8%, up 340 basis points from the prior quarter. Margin expansion in the quarter was primarily driven by improvement in product margins, and an improved mix within services.

In total, Life Sciences achieved record revenue and operating income. At 6.4%, we are on track to achieve our 10% operating income target by the fourth quarter. As indicated previously, revenue growth, cost improvements and favorable mix is the road map to get us to the 10%.

Our next step is in the third quarter, when we expect to have $50 million to $52 million of revenue.

Let's turn over to Slide 5. Semiconductor Solutions revenue increased 12% compared to the first quarter. We saw growth across all product lines sequentially including vacuum automation, cryogenic vacuum products, contamination control and services. We also saw strong growth year-over-year of 18%, which was supported by all areas, except the Contamination Control Solutions. While this area was down more than 30%, the automation and cryo products were each up more than 30%. Highlighting the strength and diversity of our portfolio.

The adjusted gross margin for semiconductor was 41.5% and operating income margins are nearing 20%. This is more than 400 basis points above 1 year ago and reflects significant structural improvements of cost and throughput achieved in the operations of our business.

Let's now turn to the balance sheet on Page 6. Accounts receivable increased by a modest 2% with an improvement in days sales outstanding by 5 days. The inventory and payables balances increased commensurately, supporting growth in both businesses and are particularly, supply to -- tight supply chain in the semiconductor space. We ended the quarter with $245 million in cash, cash equivalents and marketable securities, up $13 million from the December 31, 2017, balance.

Let's turn now to cash flow on Slide 7. Operating cash flow in the quarter was $20 million. The benefit of the valuation allowance and net income is a noncash event, so it's deducted in the cash equation. You will see the investment in working capital of $10 million as mentioned. And the other line show up this modest changes representative of a normal quarter. While we have had working capital increase in support of both segments this year, the largest share is supporting the Semiconductor expansion.

As Steve indicated, since the close of the quarter, we have acquired 2 businesses for cash. The cash used for both purchases net of cash received has totaled approximately $16 million to date.

Let's turn to Slide 8 to see an overview of those 2 acquisitions. We believe we have picked up 2 gems that complement our current offerings nicely. The Tec-Sem business fits into our Contamination Control Solutions business and comes at the right time. We expect the reticles will be increasing in volume and usage with EUV and will become a larger dependency for contaminant-free yields. Since entering the contamination control business, our revenue direct with fabs has grown and regularly exceeds 30% of our total semi revenue. This acquisition will be incremental in our diversification of our customer waiting.

The Canadian-based biorepository, BioSpeciMan, expands our customer and geographic reach of the Biostorage services business and Life Sciences. The profile is very easy to integrate into Biostorage services, and our joint teams are already in motion to do so. I remind you that we continuously look for acquisition opportunities. Our primary focus is to build out the life sciences cold chain offerings and reach, but we remain diligent to pick up opportunities in the semi space, which complement our technology offerings or our customer relationships. Our internal model drives us to seek out returns, which exceeds 13% return on invested capital within a 3- to 5-year horizon.

Let's now turn over to Slide 9 and consider the guidance for our third fiscal quarter.

Revenue is expected to be in the range of $215 million to $225 million. Adjusted EBITDA is anticipated to be $43 million to $49 million. Non-GAAP EPS is expected to be $0.40 to $0.46 per share. This guidance reflects an approximate $0.01 dilution to the non-GAAP EPS driven by the Tec-Sem acquisition in the quarter. By the fourth quarter, we expect EPS will be benefiting from both of those acquisitions. The GAAP earnings per share is expected to come in at $0.28 to $0.34.

So that concludes our remarks, as prepared. I'll now turn the call back over to Scott to take questions from the line.

[Operator]

[Operator Instructions] Our first question is from the line of Farhan Ahmad with Crédit Suisse.

[Farhan Ahmad, analyst]

My first question is on the CCS business. [indiscernible] Can you just talk about how we should think about the growth in CCS going forward? And what are the main drivers that will accelerate the growth for CPS?

[Lindon Robertson, executive]

Can I just make sure I'm understanding, Farhan, which business you're referring to?

[Farhan Ahmad, analyst]

Contamination Control?

[Lindon Robertson, executive]

Yes, okay. So contamination control is in the semi business, and it's underneath our General Manager Dave Jarzynka. And we do continue to have much optimism there. I'm going to comment initially let Steve chime in here. Last year, in 2017, had reached $84 million. And that was up from $52 million in the previous year. While it's still down, we have been talking and we continue to see the demand picking up here in the second half. It picked up in the second quarter modestly. In the third quarter, fourth quarter, we expect it to continue. Whether we make it all the way to -- a growth here still remains to be seen on what investments are determined by the fab. But we think that we're in the hunt for another solid year.

[Farhan Ahmad, analyst]

Got it. And then in regards to your Chinese and Korean equipment suppliers, can you just talk about how much of the business is coming from sort of the new equipment suppliers in Korea and China? And how do you see that trajectory of that growth going forward?

[Stephen Schwartz, executive]

So Farhan, we have -- we had the Korean equipment makers now for quite some time. A lot of the Chinese equipment makers are relatively new. So I'd say in the last 2 to 3 years. But what we see is that as they get more capability, they win more of the process steps. And so the volumes generally are increasing. And also there's a lot of enthusiasm, as you can imagine, around some of the opportunities who exist in China, where some of the equipment makers are putting some pretty significant forecasts out there.

[Operator]

And our next question is from the line of Edwin Mok with Needham & Co.

[Y. Edwin Mok, analyst]

So first just quickly housekeeping. Tec-Sem, you said there's $0.01 impact. Is that just for GAAP or both GAAP, non-GAAP? And can you just roughly tell us how much the 2 acquisitions -- how much revenue those 2 acquisitions add to your guidance?

[Lindon Robertson, executive]

Yes, so this last year the estimated revenue was about $13 million on a GAAP basis. And we ended up paying approximately $14 million after netting down the working capital. Not all payments made because as we shared at the press release time, we first acquired 93% from primary holders. We still have about 7% to close out with minority holders. In the guidance, we're careful on this. We do have good orders. We have visibility too, but with the experience that we've had being limited. The run rate of about $3 million a quarter or so I think is the right expectations about what we have folded in.

[Y. Edwin Mok, analyst]

And then the $0.01 impact, is that just from low margin business overall? Or is it just only on GAAP results [indiscernible]?

[Lindon Robertson, executive]

Yes, I'm sorry. That's a non-GAAP dilution point of about a penny. And I would expect -- I'll go back to the amortization after the Q, and it will be spelled out for you there. But I -- Edwin, on our -- our expectation is that as we move through this quarter, we've got some integration to do. As Steve mentioned, the approximate location of this is really close to our CCS business in Germany. And so we see some synergies and some opportunities there, and it'll -- there's a good opportunity. So by the time we get to the fourth quarter, and we do see demand ramping in the near term, then with that demand and with our integration activities, you'll see it to become accretive on a non-GAAP basis.

[Y. Edwin Mok, analyst]

Great, that's helpful. And then just kind of sticking with semi, I think your guidance at the midpoint even backing out growth in CCS. It seems like you guys adjusting your vacuum automation business. Can you still continue grow? I've heard -- all these we heard from some of your large customer talking about low levels [indiscernible] in the coming quarters. Just curious, what's driving the growth in the June quarter, and how do you guys see that business going on beyond the June quarter?

[Stephen Schwartz, executive]

Yes, Edwin, we're also a little bit curious because we've had mixed results. But our -- the order book is pretty strong. And some customers are still more bullish than others, and our order book remains one that gives us pretty high confidence in growth again in the June quarter. So the bookings are strong, and the demands for customers, at least over the next months are pretty solid. So we're busy, and it's a little bit surprising to us that we have probably the biggest variance we can remember in a while, amongst the various OEMs. But we're pretty confident about at least what the next quarter looks like and especially in the vacuum automation side.

[Y. Edwin Mok, analyst]

Okay, great. That's certainly helpful. And then just quickly on Life Sciences. You guys did this acquisition of this Canadian repository. And then since you guys are doing some work in Europe, I'm just curious, is geographic expansion a big driver there? From what I remember, both of your sample storage capabilities there has been based in U.S. Is that correct? And is there room to expand into international sample storage opportunities?

[Stephen Schwartz, executive]

That's correct, Edwin. So basically, it was an opportunity that came up because we happened to be a real good buyer of repository in Canada. It's not all Canadian samples. They have a storage facility in Pennsylvania. And as a matter of fact, even in Indianapolis and our European sites, we have samples from at least dozens of different countries in any one of those sites. So irrespective of where the biostorage biorepositories are, the samples are from all over the world. And that's pretty consistent with the model. And you'll find that almost any size biorepository they have samples from many countries. So geographically, it's a benefit for Canada because I think about half the customers are Canadian customers. But only half of the customers were Canadian customers.

[Y. Edwin Mok, analyst]

Okay. Actually that's helpful color. One last one, if you don't mind me squeezing in. Just -- and we heard a lot of talk about compound BioStorage equipment that you guys have talked about before, how is that progressing?

[Lindon Robertson, executive]

The compound -- chemical compounds in -- let me comment on this. If I'm understanding your question, I think you're asking are we progressing in storing chemical compounds. In general...

[Y. Edwin Mok, analyst]

Yes, sorry. Let me just correct. I'm talking about lower temperature sample storage equipment that you guys have talked about historically, that you guys are trying to go into that market?

[Stephen Schwartz, executive]

Yes, so that's the BioStore III Cryo. So that's the cryogenic -- that's at the cryogenic temperature. Edwin, we keep making progress there. We did another $1 million in the quarter. And again, that's at a pretty low level, but consistent with where we've been. A little bit up from last year, but this is a really steady, slow progress, and we win those one customer at a time on the automated systems. I think on the last call, we did talk about 2 pretty good size installations that will go in towards the end of '18, early '19, where we actually provide some automation to fully automate these cryogenic systems and connect them together. So we're really bullish about the opportunity. And this one continues to be at a slower pace than we had anticipated, but steady as we reforecasted for 2018.

[Lindon Robertson, executive]

And Edwin, I'm going to follow-up on your question. I was able to confirm, the extra amortization step up in that cost that would be in the GAAP results related to the acquisitions would be about another $1.2 million on a GAAP basis. So while we said, it'd be about a $0.01 hurt on the non-GAAP, it'd be about another $0.015, round numbers on a GAAP basis.

[Operator]

We have a question from Craig Ellis with B. Riley FBR.

[Craig Ellis, analyst]

Yes, I’ll start with just a housekeeping question, looking back and clarifying, and issuing my model for the reported quarter. Lindon, I know you mentioned the segment operating expenses, but I missed those. So can you just walk me through what drove the sequential increase in OpEx in the quarter?

[Lindon Robertson, executive]

Yes, with the accelerating performance, one item is the accruals of variable compensation. And when we talk about variable compensation, this isn't really cash-in and executive. Well, it's across all employees. All employees participate in a variable compensation. So we've taken the accruals up. And when you see the acceleration of the annual performance in the middle of the year, and you increment that, you're picking up the year-to-date adjustment for this current year. And then this, the second element is we had some professional service expense that we incurred in the quarter. So what I want to highlight about this is, while the variable compensation accruals will, to some degree, provide some continued expense in the second half, not on a catch-up basis at a level out a bit little more. It wouldn't be with us structurally, other than a on a outperformance right, which we're already accruing. And then on the professional expenses, we also don't see that as being structural add to the business.

[Craig Ellis, analyst]

And is the accrual driver revenues or gross profit dollars or operating profit. What's the drivers to the accrual trigger?

[Lindon Robertson, executive]

It's largely the operating profit as well as revenue growth. And that's on the cash based. When you go to the long-term, you'd see the executive plan shift more to an ROIC weighting, including the operating income as well. But a heavier weight. But in these accruals that I'm referring to, it's on the current year, which is operating income revenue and gross margin is in there.

[Craig Ellis, analyst]

And then, Steve, you mentioned in your prepared remarks, 28 semiconductor segment design wins in the quarter, which was an unusually high number. I don't recall you mentioning that data in the past. So can you give us some context around where that number might have been over the last 4 quarters or so when -- and was there any particular segment of the ones that you talked about, whether it's vacuum, robotics or CCS or advanced packaging that really stood out in terms of generating all those design wins?

[Stephen Schwartz, executive]

Sure. So Craig, just to give you -- this is a metric with very specific targets that we set out at the advance of every year. So the account teams and the engineering teams are aligned on the ones that we consider to be really important. Of the ones that are on our list that we did 28 design wins, 21 were targeted at the beginning of the year. And some just come along and we'll take them, but they may not have been as strategic. So the historical average for us is about half of that. So just to give you an idea, for a -- in a typical quarter, 15 to 17 would be pretty normal. And so to double in a quarter is pretty outstanding. It's something we used to report on a call years ago. And back then, it was in that 15 to 17 range, too. But it's a deliberate -- there's a deliberate set of wins that we set out to achieve. And we kind of -- we had a really unusual quarter and a real testament to a lot of the capability. And on the terms of the wins, we think it's really important to make the same presence in CCS in China that we have in the other regions. And so we're not sure at what rate expansions will take place, but we want to be there and we want our tools in those fabs because we also think that the model for some of the foundry activity is going to be what takes place in Taiwan. And so we want to make sure that we don't just get designed in, that we're participating in all the volume that comes, too. So 11 CCS wins in China is a huge accomplishment for us in the quarter.

[Craig Ellis, analyst]

Yes, that is, and congrats to David's team overall for the performance with the design wins. Connecting that activity and your comments that, that really led confidence to the business' performance in 2019 and some of the comments about very near-term dynamics, you entered the quarter with a strong backlog performance. Can you comment on the visibility that you either do or don't have for the back half of the calendar year? How is it looking for you? And are there any parts of the business that would stand out, CCS, advanced packaging, vacuum automation, et cetera?

[Stephen Schwartz, executive]

So across the board, Craig, we -- across the board, the indications we have are strong. We really get orders a quarter in advance. But all of our customers give us an indication to make sure that we're ready, especially in these days when the supply chain is really tight. So the indications and the request for us and the audits on us to be prepared are pretty significant. They would indicate this continued strength in the back half of the calendar year, but again, anything can happen. And so we're -- we remain confident about what we hold orders for. But by and large, the health of the backlog and the pressure from our customers give us an indication that, at least, readiness is the order of the day. So that's about all I can say. I wish I could be more concrete. You can tell a little bit from the bookings again that people want to make sure that they're in the supply chain with claims to product, but again, I think that's going on probably across the industry.

[Craig Ellis, analyst]

Got it. And then lastly, goodness, I'm not sure if this is for you or for Lindon. But there is a reiteration of the 10% operating margin target for the Life Sciences business. And I think from the most recent quarter, our gap, there's about 350 basis points. So between where we are now and that 10 percentage point target, what are the things that really close the gap? How much of that is either organic revenue growth or inorganic revenue growth or just gross margin expansion in closing the 350 basis point objective?

[Lindon Robertson, executive]

So I think you're going to see the balance of it come through a split across margin and operating expense leverage. So we still have progress to make in the gross margin, and this is partly in the cost of our footprint and operations as we consolidated in Manchester. By the way, we made substantial progress over the last 2 quarters. We made it in 2, what I would call, half steps to get to here thus far in the manufacturing cost of the operations in Manchester. So they're doing a great job in progress, and we still have a list of opportunities to close in on. And then similarly, we've got operating expense. As we described before, we'll yield some out of that in terms of holding our investments flat and continuing to work our integrations into the mix of what we have for efficiency. So you'll see, I believe, the 3.5 point to beat roughly half share by the time we get to fourth quarter between gross margin and OpEx leverage.

[Operator]

We have a question from Paul Knight with Janney Montgomery.

[Paul Knight, analyst]

Could you talk about the BC3 (sic) [ B3C ] uptake and kind of the capital equipment side of the Life Science business as kind of how it wrapped up in the quarter?

[Stephen Schwartz, executive]

Yes. So the B3C, again, makes a steady -- we're making steady progress there, Paul. What we're finding is that there's a lot of evaluation that goes on when people take a B3C. So it takes considerable amount of conversation. But when we find customers take a B3C, they don't go back and buy a manual tool. So this is one that's really encouraging for us. And on the larger automated store side, that was a really healthy quarter for us, was up 25% year-over-year, and it generated about $9 million of revenue. So between the B3C around $1 million and the automated stores around $9 million, it was a pretty healthy quarter for us. Again, we're going to continue to focus on the B3C. There are customers who absolutely want that technology. And just the need is a scientific one right now, but it's not a huge volume driver. But we are accumulating the right kind of customer base. And we supplement that with the cryo carrier that we have and the filling station. It allows them to not just store the samples in an automated system but also transport them through the facility at safe cryo temperatures.

[Paul Knight, analyst]

And Steve, with the BioSpeciMan acquisition, what are your number of physical locations now globally? And is it making the sales cycle easier? I mean, what is it doing for you guys to have a network that is probably not matched by anybody else?

[Stephen Schwartz, executive]

Yes. So we have 6 sites right now. It gives us -- Paul, what happened is it gives customers who think they need samples close by. It gives them comfort to put them into a rather local bio-repository. And after we have the samples for a number of years, they are very comfortable moving them to another locations. So it gives us economies to put them into a more economical site. But in terms of winning business, the proximity does seem to help for first-time wins on the business. So we're at 6 right now. We're going to continue to do some consolidation. We talked on the last call about another site that we're building for a customer, very close to a customer. And that's an important one for us. You may see us when there's a site with -- that has enough economic advantage, that can be large enough that we may put them close to customers here in the near term. But again, we have to drive economies for it, and so we'll always evaluate each one case by case, but 6 now going to 7 and we may consolidate back to 6 by the time we get to a year from now.

[Paul Knight, analyst]

And then lastly, can you compare or contrast this quarter with the December quarter in terms of customer interest, demand on BioStorage and services?

[Stephen Schwartz, executive]

Again, I think the demand continues to increase. We see a steady increase in the amount of outsourcing. We're not very specific about the sample count, but you can imagine we have it somewhere around 1 million samples from existing customers in the quarter. And that's a really good quarter for us. And we're going to continue to build that way. But what we find is more and more customers are very comfortable with outsourcing and they're making that asset decision. And we continue to see the trend building. So we're really bullish. The fact that we had 28% growth in BioStorage business, we think that's the path for us going forward.

[Operator]

We have a question from Amanda Scarnati with Citi.

[Amanda Scarnati, analyst]

Just a quick question on the semiconductor business. As you look at the linearity of the orders throughout the quarter -- I know it was a really strong quarter in terms of orders, how did that progress? Was there a bigger push later in the quarter? Or was it sort of evenly spread out?

[Stephen Schwartz, executive]

Yes, Amanda, it's relatively linear. I mean, we see bigger weeks and not -- but we look at the data once a week, and what we see is a pretty steady pattern. So when we were -- I'll give you an example. 4 weeks into the quarter, we were on a trajectory to end up about where we ended up. And so it was pretty steady through the quarter, but that's something going to happen to us. It's not something that's a normal pattern necessarily, but generally, we had an -- in this particular quarter, we had an indication from the start that it was going to be a pretty good-sized quarter. But we're never sure until the last week of order taking.

[Amanda Scarnati, analyst]

And then on the Life Sciences side, if you continue to add these smaller storage companies that have locations in various place around the world, is there an opportunity to gain additional margin scale? Or is it difficult to take out cost as the storage facilities are kind of spread out?

[Stephen Schwartz, executive]

So to give you an example, we're looking at the means by which we put the samples in the most economical place right now. So what we can do is as we begin to fill a site, there are some samples that are truly archived that can be moved to a less expensive site. And if customers need some nearby, we'll empty space in the bio-repository, maybe move those samples to Indianapolis and free up space at a regional site for the customer. So that's a daily activity that Dusty and his team go through. And it's -- we make sure that when we go to pick up a bio-repository that it's a good margin business, fits the business model to begin with. But then there are things that we can do in terms of making good decisions about adding additional storage capacity. We always want to put that into place where it makes the most sense. And right now, Indianapolis is one of the best sites that we can imagine. We still have a lot of capacity in Indianapolis. But the margin of the business is really good. The way Dusty and his team manages it is for good, long-term growth -- good long-term profitable growth in this business.

[Operator]

We have a question from Drew Jones with Stephens Inc.

[Andrew Jones, analyst]

Just one from me. Looking at the 10% op margin metric that you talked about to exit the year on and, Lindon, you kind of mentioned the possibility of scaling back some investment spend in the fourth quarter to get there, are there any growth opportunities that could be impacted or restricted from that sort of cost containment just to get to the operating margin bogey?

[Lindon Robertson, executive]

And I appreciate the question because what we've said is Dusty and the team will be making some specific pockets of investment. But they will also be realizing some savings and efficiencies out of other areas. In large part, the sales structure, the team is in place to deliver through this year and even go into next year. And so that's why we have confidence that as we grow, we're not going to be adding expense structure. But under the covers, there's still a little bit coming out and going in, and we're not sacrificing top growth opportunity for expense savings here.

[Operator]

[Operator Instructions] And we have a question from the line of David Duley with Steelhead Securities.

[David Duley, analyst]

A couple of questions from me. As far as this new acquisition, I guess Tec-Sem, could you perhaps take a stab at what you think the size of this market is going to be in 1 year or 2? Or help us understand what the potential market opportunity is.

[Stephen Schwartz, executive]

David, it's a really good question. I think if we put a peg on this one, we'd guess that this is a $30 million opportunity that can grow to $50 million here in the next few years. So it will depend on the products that we put together in and around EUV. We know about the size of their reticle storage market, probably around 30 today, and we feel really good about that. And again, depending on the amount of acceleration we get from the EUV site, that will determine how big and how fast this can grow.

[David Duley, analyst]

Okay. So the market expansion is mostly EUV-driven [indiscernible] the $50 million?

[Stephen Schwartz, executive]

The incremental market from today, that's right, because the Tec-Sem team has a really strong presence in the reticle management market today. And we think that additional growth will come from the products that we develop in and around EUV. We have the EUV carrier cleaner already in the CCS business, but we think that the value and the complexity of handling the reticles for EUV might bring us other opportunities in terms of how the reticles are stored.

[David Duley, analyst]

[ Moving ] to my next question. As far as the FOUP cleaning business, what impact does EUV have on the -- on that business? Will you -- does it expand the size of that market?

[Stephen Schwartz, executive]

We don't anticipate that it will expand the size of the FOUP cleaning business. That will be a volume and process, step-driven capability, but I don't have a good assessment of that yet, David. It's a good one for us to think about, but we don't know why that would necessarily change meaningfully. I will tell you that the impact of the ion implant, for example, on the photoresist process does cost, different contamination that people make sure to clean the wafers and clean the FOUP. And I can't say that we know the impact of EUV on something like that yet.

[David Duley, analyst]

Okay. And then as far as the FOUP business goes, you're forecasting a nice bump up in the June quarter, and I'm assuming September quarter would be up as well. How much of the increases that you expect over the next couple of quarters are driven by memory versus the foundry and logic space? And then also as another vein, how much do you expect the Chinese wins in this business to contribute to revenue in calendar '18? Or however you'd like to characterize it.

[Stephen Schwartz, executive]

We don't have that specificity of the breakout right now, but the foundry business is beginning to increase. So you'll see something that -- but we -- and we always continue to forecast that the number of these cleaners going into memory fabs will be significantly less than go into a high-end foundry. But we don't have that specificity to give you yet. But we are pleased by the breadth and the number of different customer applications we have besides just Tier 1 foundry.

[David Duley, analyst]

Just perhaps an idea of when you might see more Chinese revenue or any sort of guess as to when you start to see significant revenue from that geographic region in FOUP.

[Stephen Schwartz, executive]

So we'll see some revenue beginning in the Q4 period of our fiscal Q4, but I don't know what to tell you about when it will be appreciable because again, we've -- we'll have orders and other equipment companies have orders for populating those fabs.

[Operator]

There are no further questions at this time.

[Lindon Robertson, executive]

Okay. Scott, I think we can wrap up then. And I'll just extend my thanks to all the analysts and investors that have listened in with us, and we look forward to talking to you again this time next quarter. And thank you very much.

[Operator]

Ladies and gentlemen, that concludes the call for today. We thank you for your participation and ask that you please disconnect your line.