AZTA (2019 - Q1)

Ladies and gentlemen, thank you for standing by. Welcome to the Brooks Automation Q1 2019 Financial Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday, February 5, 2019. I would now like to turn the conference over to Lindon Robertson, Executive Vice President and Chief Financial Officer. Please go ahead. Lindon R

Thank you, Dave, 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 2019 ended on December 31st. 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. We may also refer to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP. We believe the 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 31st, which is our second quarter of the fiscal year 2019. We will then take your questions at the end of those comments. Just before turning the microphone over to Steve, I would like to remind everyone that in our prior quarter, we moved the Semiconductor Cryogenics business into discontinued operations for reporting of results. The depending sale was announced on August 27, 2018 and continues to await approvals by government agencies. All reporting, commentary and guidance in this quarter focuses on our continuing operations. So, with that, I would like to turn the call over now to our CEO, Steve Schwartz.

Thank you, Lindon. Good afternoon, everyone and thank you for joining our call. We're pleased to be able to report to you on the results of the first quarter of our fiscal 2019. I have to say we're off to fast start to 2019 as we took more significant steps forward in the transformation of the Company. On our last call we described for you two significant changes that we triggered in the September quarter. We announced sale of our cryogenics vacuum business to Atlas Copco; and the acquisition GENEWIZ, a fast-growing, highly capable genomics and molecular biology company. Either of these transactions alone would have been transformative but the near simultaneous implementation simply accelerated the transition of our business toward high growth sectors in the semiconductor and Life Sciences market. We’re pleased with the progress that we’ve made in our transformation as GENEWIZ met our expectations for growth and exceeded our forecast for profitability in the first half quarter of ownership. And our semiconductor business meaningfully outperformed in a challenging market environment. I'll focus my comments today on our progress in each of our business segments including highlights from the December quarter, and I'll give some outlook as to how we see 2019 shaping up. All-in, our growth story continues. Revenue in the December quarter was $179 million, up $37 million or 26% year-over-year and $20 million or 12% sequentially. And though we have revenue in Q1 from partial quarter of GENEWIZ ownership, we still delivered solid organic growth across both segments. I'll begin my remarks of results in the Life Sciences segment. Revenue in Life Sciences was $67 million, an increase of $16 million over September with essentially all of the sequential growth being attributable to GENEWIZ, which was part of Brooks for half of Q1. As a result, year-over-year growth in Life Sciences was 41%. Sample Management contributed 8% to organic growth, up from 6% at the September quarter, and we believe the start of an upward trend as we manage growth fast to least the high-teens percentage by the end of 2019. GENEWIZ showed 20% organic growth on a comparative basis for the full quarter compared to their December quarter in 2017 when they were standalone company. Overall, we're very pleased with the transformation we're expecting inside our Life Sciences business. Not only have we created a unique Sample Management capability for customers, but with GENEWIZ’s scientific analysis capability, we're now able to add more value to the samples that we manage. We're in the earlier stage of the combination with GENEWIZ, but we're already actively promoting the benefits to new and existing customers, as we're now able to extend and expand our support of their workflows, the increased levels of value and capability. I’d give some highlights from both Sample Management and GENEWIZ. The first I want to address, the growth in our Sample Management business that had slowed somewhat over the past few quarters. I also want to share with you why we're confident that we'll restore growth through the year. As we've said, we have some significant orders in backlog that have been slowed to convert to revenue due to delays in the receipt of sample collection, that is we have contracts with customers to receive, and store process samples for studies that have been delayed. Significant sample receipts from one customer project that we’d prepared for last summer, are now expected to realize later in the March quarter. Hence, this incremental business will likely not begin to show up meaningfully in our revenue until the June quarter. And although we stopped providing bookings numbers several years ago, I will note that the December quarter was a record quarter for new orders in Life Sciences and specifically for BioStorage, an indicator that provides additional confidence to our outlook for a return to growth into the high-teens by the end of the year. More specifically, on a five-year outlook, new orders in the Sample Management business came in at $70 million in the December, and this does not include GENEWIZ. We are pleased with this strong backlog, but we know that what matters is the conversion of this backlog into revenue. As I mentioned before, organic growth for Sample Management increased to 8% on an annualized basis, up from 6% in the September quarter. This is still quite a bit below what we think the market will support and the business can deliver, but we believe that this upward trend is a meaningful preview of what's to come. There are few additional highlights from Sample Management that are noteworthy. As we described for you on our last quarterly update, we’ve begun to see a new level of adoption for our cryogenic B3C system for the storage itself. That momentum continued in the December quarter with cryo revenue coming in at $2 million, made up of 15 system shipments to 12 customers and backlog stands at almost $5 million. As immuno-oncology research efforts have expanded and the number of trials for cell and gene therapies are multiplying, we are seeing a corresponding increase in the interest in our cryo Sample Management product. In Q1, we shipped our 100 system, and we now have installations with more than 50 customers. You'll hear more from us on this topic as we gain more acceptance and as our innovation capabilities become part of the standard that define cryogenic Sample Management storage. Although, we were still burdened with the margin profile of a couple of systems that are still in our pipeline, we had the strong bookings quarter for large automated stores that our configurations that we've already built and which carry a margin profile that will allow us to get this part of our business back to our target level. Included in our stores orders is a large multiple system order for another Chinese customer as a follow-on from our NHC reference site. The validation that we're beginning to read for return for our initial stores investments in China. We're also very pleased with the performance of GENEWIZ. It’s in our first quarter together, the business performed just ahead of expectations and exactly on the growth trajectory that they have been on prior to joining Brooks. Even in the midst of the sale process and a very busy first quarter of integration activities, the team did not skip a beat, and the business delivered to commitment. Although we include only half of the quarter in our Q1 results, GENEWIZ delivered $16 million in revenue to brooks and $33 million for the full December quarter, representing 20% year-over-year growth, driven by 30% growth in next generation sequencing and 15% growth from Sanger sequencing. In the quarter, GENEWIZ expanded clinical services offerings with the addition of population scale, clinical grade, whole genome sequencing and whole exome sequencing services. Taking together with the existing CLIA and CAP compliant Sanger services, these new offerings will allow us to tap the rapidly growing clinical development market and provide solutions for clinical biomarker development program. Additionally, we began providing sequencing services to customers from our Leipzig Germany site, our first GENEWIZ facility in Continental Europe. With this strong start to 2019, GENEWIZ remains on track for another growth year of approximately 20%. And we're energized by the abundance of opportunities that they've identifies which we intend to accelerate by taking advantage of our existing footprint and available capital. Additionally, it's important to note that customer capture was robust across Life Sciences in Q1 as we added 60 new customers in Sample Management and more than 100 new customers to GENEWIZ. We are particularly positive about the future as there are numerous sales synergy opportunities between Sample Management and GENEWIZ that we're beginning to define. We're positioned to continue to win new customers and to gain share with existing customers as the research demands intensify in terms of increased sample volume and decreased turnaround time to information, a perfect market environment for us. In the March quarter, we look to more revenue growth from both parts of our Life Sciences business. With all that's going on in the life sciences field with new companies emerging each quarter, which depends on high quality biological samples and the genomic data they contain, it’s no one that we’re growing so rapidly. However, in the semiconductor side of the business, with the semiconductor environment and a slowdown and capital equipment supplier revenues contracting, the reasons for our growth require some additional explanation. Semiconductor revenue from continuing operations, which is largely our automation business, was up 4% sequentially to $112 million and up 18% year-over-year. We recognize that this is quite different from what you've heard from other semiconductor equipment companies, and I'll try to give some color as to what's different about our business. So, first, I'll describe what is not different about our semiconductor business as it relates to what's going on in the mainstream equipment business. Revenue from our vacuum robots which we provide to Tier 1 OEMs is highly correlated to their business. In the December quarter, vacuum robot revenue was down approximately 12% from September quarter and 17% from the December quarter one year ago. This is consistent with the market and with Tier 1 OEM shipment. And in the March quarter, we anticipate yet another downtick in this portion of our business. And though lower than we'd anticipated based on prior forecast for out period, it does appear as though March should be the low quarter this year, and this will be the level approximately half of our peak for vacuum robots that we achieved in June quarter 2018. That said, our vacuum systems business was up in the December quarter at almost same peak level that we delivered in June 2018 quarter, driven largely by Tier 2 equipment makers in China who are delivering equipment to applications that include RF components with the start of 5G rollout, imaging devices which are being manufactured on 200-millimeter generation tools and power devices for various consumer applications. We reiterate that we have a large number of Tier 2 OEM customers who depend on us for their automation need, and a high percentage of this business is for more complete vacuum automation systems rather than simply component robot. ASPs of vacuum automation systems are considerably higher than if the customer bought only vacuum robot. When we combine the results of our vacuum robots with our vacuum systems, our overall vacuum automation business was up 6% sequentially from the September quarter. Hence, the way we've expanded our product portfolio to approach more customers with high value solution is definitely working as we expand our market and gain share with these rapidly emerging customers. The importance of this two-tiered vacuum automation market is clear, because when the mainstream semiconductor equipment market for memory, logic and foundry returns to growth, our Tier 1 OEM robot business should recover with the Tier 2 systems customers who are gaining share during this period to grow even more. In the advanced packaging business, we remain relatively healthy but decrease modestly in the December quarter to $13 million, down from $14 million in September. We continue to gain share by winning some new applications including new tool design for 300-millimeter wafer bond. We assume this segment evolves and expand as we are receiving new and more complicated wafer handling challenges every quarter. Fortunately, we have the expertise and experience to be able to craft innovative solutions to some of the very complex automaton problem. And we had a strong performance in the contamination control solutions with revenue in our core CCS business of $19 million, up $5 million from one year ago and up $3 million sequentially. CCS reticle storage were similarly up $2 million sequentially to just over $9 million in the quarter for a total CCS business of $28 million, up 22% from the September quarter. Most of the increase in the core CCS business came from strength across both foundry and memory. And it's important to note that the adoption of EUV technology is beginning to provide meaningful revenue for both reticle pod cleaning and radical storage, and is approaching 20% of first half CCS revenue. In the quarter, we did recognize approximately $3 million of customer accelerated CCS-RS revenue that we previously anticipated for the March quarter. In any case, the CCS-RS business is performing extremely well. And we’re pleased note that in only our first three quarters of ownership, we've won significant market positions in several new factories in Asia, we've achieved all of our integration milestones for engineering and manufacturing, and in just three quarters, the business has delivered $20 million in revenue, already, more than the $16 million we paid for the business in April last year. We're very pleased with the team and the excellence that of these products and technologies into our portfolio. Because of the significant Q1 closing, we anticipate the CCS-RS revenue will be down slightly in March, but the continued strength of our core CCS business should make up the difference, as we forecast the total contamination control business to be almost flat in the March quarter. Overall, as we guided in our November earnings call, our semiconductor business is being held-up by the strength in our systems business and contamination control solution. And even in a period of weaker Tier 1 OEM equipment shipment, we forecast the March quarter for semiconductor to be flat to down 4% sequentially, and this level would be flat to slightly up year-over-year. All-in, we're pleased with the tremendous progress we made during the December quarter. We're energized with the opportunities that lie ahead of us in Life Sciences where we've only just begun to satisfy the enormous demands for the capabilities that we provide. We’re engaged with companies of all sizes, but we offer the same value to each, and we're committed to innovation and service to all of them as they conduct research to enable the next medical breakthroughs. In semiconductor, our enabling products have high market share in growing market segments, and we are ready today to meet the challenges that are still years away on our customers’ technology roadmap. And to wrap up my comments here, I would like to summarize our current status and let you know how we look at our progress against the actions that are required to meet the 2019 deliverables we described for you on our last call. There are four keys to making sure that we hit our 2019 commitments for financial results and sustained market position. Number one, the semiconductor business performance outgrows the equipment market growth by 5%. And we believe we’re ahead on this subject. Number two, GENEWIZ continues on its trajectory to deliver 20% organic growth and the profitability of the company to add additional revenue. Again, we’re confident that we are on track. Number three, we return the Sample Management portion of our Life Sciences business to organic growth rate with at least the high-teens percentage on an organic basis and that we achieved gross margins above 40%. On this important objective, we are light on proof point, but I can assure you that it has the full focus of the Company and we're confident that we have the proper actions in place to achieve this important goal. And number, we completed the sale of cryogenic vacuum business to Atlas Copco. On this objective, we remain confident that we'll be able to complete the CFIUS review and close the transaction, but the delay has not been hopeful. As always, we look forward to our opportunity to deliver more value to our customers and more return to our shareholders. And I have to say that it's a really good time to be at Brooks and we thank you for your support. That concludes my formal remarks. And I'll turn the call back over to Lindon.

Thank you, Steve. Please refer now to the PowerPoint slides available on the Brooks website under Investor Relations tab. Please turn with me to slide three. Revenue increased 12% in this first fiscal quarter of 2019 compared to the first quarter of ‘18, arriving in a $179 million. On a year-over-year basis, the growth was 26% including 9% overall organic growth and $16 million of growth from the newly acquired GENEWIZ business. I should highlight that we implemented the new revenue accounting guidance ASC 606 in this quarter. The net impact was small but affected each segment differently. In semiconductor, we realized a $400,000 of additional revenue in the period than if we continued the prior method. And in Life Sciences, we realized approximately $800,000 less in this period. In total, it was a nominal effect of about $400,000. We have adopted the change on a modified retrospective methodology, which means we've not restated prior periods for the effect. Looking at our GAAP earnings, continuing operations was $0.09 per share. We had 47% growth on the operating income line, driven by 12% revenue growth and margin expansion. More significantly, we had $5.8 million of tax benefit in the quarter on a GAAP basis, more than offsetting the increase of the interest expense recognized. Let's look over to the non-GAAP results on the right side to explain the performance more clearly. Adjusted gross margin expanded a 130 basis points sequentially and a 190 basis points year-over-year. The first 100 basis points reflects improvement, driven from the operations of the base business year-over-year and 90 basis points from the addition of the GENEWIZ business, which carry non-GAAP gross margins of 50%. Non-GAAP operating margin, as you can see, expanded 160 basis points on the sequential quarters and 240 basis points year-over-year. I'm pleased to report that GENEWIZ was accretive to operating income on both the GAAP and a non-GAAP basis in the quarter. But, this was not the sole source of improvement. Operating margins of the base business improved 110 basis points sequentially and 200 basis points year-over-year. GENEWIZ margin drove approximately 50 basis points of health in each comparison. Below operating income, we saw $2.9 million of incremental net interest expense, driven by the additional debt utilized to fund the GENEWIZ acquisition. We will see a similar increment on this line in Q2, as we only carried the added debt for 47 days in Q1 but we now expect, we will carry it for the full 90 days in Q2. You can expect this line to show $8 million of expense in total for Q2. Our intention is to remove this incremental debt after closure of the sale of the cryo business, now expected to be in the June quarter. Now, on the tax line, we had $1.9 million of incremental tax expense recognized, driven primarily by the higher tax-free. As a reminder, in 2018, we reversed the valuation allowance on U.S. deferred tax assets due to the accumulation of improved profits in the U.S. and our forecast. The result in this year is that we begin showing the U.S. tax rate each period instead of offsetting with reserved assets. In total, non-GAAP EPS from continuing operations was flat sequentially and 89% higher year-over-year. We see this performance in our first quarter is on track and a little ahead of the growth and income expectations we forecasted and in support of our 2019 target earnings. I will address semiconductor first on slide four. The semi business has provided strong growth trajectory for more than two years now, and our business continues to strengthen in depth both with individual customers and in the breadth across our customers. The momentum of new design wins over these recent three years has led to shared growth and our reliability in delivering has cemented that path for years to come. Steve has already described the strengths of our semi business, which is supporting our growth in this challenging semi market. Certainly, the 4% sequential growth is another standout result. We report our semi business in the three reporting units of automation, contamination control, and services. So, let's take each piece. In automation, which is serving multiple customer facets capacity in semi CapEx, it was down 1% from the prior quarter. And in simplest outline, it is comprised of automation components or robots, systems for the front-end of the line and systems for the back end of the line. The robot is the center of each of these, but as we've often pointed out, the systems encompass more content and engineering value in support of the second tier OEMs. Behind the essentially flat automation business, we saw softness in the robots, and in the back end of the line with each down approximately 10% compared to the fourth quarter. But as Steve pointed out, we saw strength in the systems business reporting the front end of the line, which increased 18%, with help from a surge of growth in 200-millimeter customers. In contamination control solutions, our product has delivered directly to the fabs and increased 22% sequentially in this quarter. Growth in contamination control solutions was strong across boot cleaners and reticle stockers. And in the services revenue stream, which remains relatively steady, we saw down 2% compared to the fourth quarter. As you can see in total, the semi businesses is operating on a level 18% higher than one year ago. And I should highlight we have seen year-over-year growth in all of the operating lines I mentioned above. Gross margin improved 40 basis points sequentially and 70 basis points year-over-year. The improvement is very reflective of the favorable mix trends referenced in the areas of revenue growth, that being increased deliveries to the Tier 2 OEMs and the fab end users. The growth and margin expansion, combined with good expense controls resulted in operating margin expansion 240 basis points to the bottom line, and operating income increasing by 41% year-over-year. Moving on to slide five, let's review Life Sciences. Revenue for Life Sciences in Q1 was $67 million, up 41% from the first quarter of fiscal 2018. These results include 8% organic year-over-year growth of Sample Management, and $16 million of revenue from GENEWIZ which joined our business November 15th upon closing of the acquisition. I will outline the performance of Sample Management business first. Organic growth of 8% in Sample Management business driven across the offerings, meaning that systems grew which was driven by decreased cryo systems, consumables and instruments also contributed and BioStorage also grew. On a sequential basis, the revenue reported for Sample Management is down 6%, and without the effect of the revenue recognition change would have been approximately flat. Consumables and instruments business drove growth, but we saw some softness in the BioStorage transactional services. Again, on a year-over-year basis, each of these areas saw growth. Gross margin of the Sample Management business expanded 130 basis points year-over-year and 10 basis points sequentially. We’ve seen progress in the issues of the large systems overruns and expect to see improvement over the coming two quarters. Operating margins for Sample Management remained approximately flat to the prior quarter. As highlighted earlier, GENEWIZ provided $16 million of revenue in the last half of the quarter and was accretive to operating profit, both on a GAAP and on a Non-GAAP basis. The revenue trend was encouraging, supporting a 20% year-over-year growth on a full quarter basis when compared to a year earlier. And as a reminder, GENEWIZ is revenues driven by three key areas of service, the next-gen sequencing, senior sequencing and gene synthesis. These are each comparable in size with next-gen sequencing the fastest growth line of 30% year-over-year in the quarter. Gross margins of GENEWIZ came in at 50%. I should highlight that we have seen indications that this business will vary in gross margin line between 47% to 51%, depending on the mix of services delivered and the investment ramp of resources to support future growth. In terms of the mix and structure of the total Life Science business, the total gross margin you see on the page is 41% and it's the result of the Sample Management margins at 38% and GENEWIZ at 50%. The GENEWIZ business added approximately $6 million to the Life Science operating expenses while the Sample Management business remained flat sequentially. Operating margin of 4% at the bottom line is comprised of Sample Management this quarter at approximately 1% and GENEWIZ at 12%. We believe the business structure of GENEWIZ is a healthy addition and valuable to our Life Science business model. So, looking into the second quarter, we expect Life Sciences revenue to be in the range of $81 million to $86 million, representing sequential growth of approximately 25%. We expect the Sample Management business to be approximately $50 million to $52 million, and GENEWIZ was to be approximately $31 million to $34 million. Turning to the balance sheet on slide six. We show the sequential change and how it breaks down between operations and the acquisition of GENEWIZ. So, from operations, net working capital increased $15 million, primarily attributable to increases to accounts receivable and a decrease in other accrued liabilities, which is primarily a result of the payment of year-end incentive awards that were accrued all year long. Inventory increased $9 million and was mostly offset by an increase in accounts payable. On November 15th, we secured an incremental $350 million term loan to finance the acquisition of GENEWIZ. The cash flows from the loan net of discounts, combined with our principle debt repayment resulted in $339 million of cash flow in the fourth quarter. For the acquisition, we used $445 million of cash and assumed $10 million of bank debt. Goodwill and intangible assets were recorded a $237 million and $189 million respectively. Net long-term deferred tax liabilities of $37 million are primarily associated with the future amortization of intangibles, which will not be deductible for tax purposes. Our cash and marketable securities balance was $138 million as of December 31st. Our total debt balance was $541 million of which $10 million represents short-term debt. As mentioned at the start of the call, you can see that semiconductor cryogenics business continues to be in the assets held for sale line in both the short-term and long-term assets section. As a reminder, we expect to receive approximately $540 million in cash proceeds, net of taxes and fees upon closing of the pending sale of the semiconductor cryogenics business. We intend to use those to reduce to the debt by the $350 million incremental debt we have recently raised. Slide seven reports on the cash flow for the quarter. And in this quarter, we produced $6 million of operating cash, CapEx was $4 million for the quarter. Thus we paid out $7 million in dividends to shareholders in the quarter and the net change in cash is largely driven by the difference in that $450 million purchase price of GENEWIZ and the approximately $350 million of debt which we raised. We used cash from the balance sheet for the remaining amount of the purchase price. So, let's turn on to slide eight, and look at the guidance for the second fiscal quarter of 2019. We expect overall revenue to be in the 190 to $200 million range, translating to year-to-year growth in the 25% range. This reflects an estimate of semi at 108 to $114 million or flat to down about 4% compared to the first quarter. We expect Life Sciences to be in the 81 to $86 million. And I highlighted on the chart that interest expense is expected to be $8 million for the year. Our non-GAAP earnings per share that is expected to be in the range of $0.07 to $0.12. And we recognize that this guidance shows less earnings momentum toward the ramp we previously described for our $1 dollar per share target for this year. From our perspective on the first half, we are on track. In the first quarter, we hit high in our revenue expectations and even higher on the EPS. The second quarter maybe softer after the higher first quarter, but it will fill in our first half expectations we had in our sites. Than it is up to the four keys, which Steve outlined. First is our semi business traction. We will be susceptible of course to significant downturn, but as you can see we're weathering this on thus far end we are still encouraged for the full year. The second is GENEWIZ. We are on track to our full year objectives and are investing behind the team that is excellent in articulating their needs for the growth. Third, Sample Management has detailed action plans and strong backlog. There is so much work to do, but the team has substance to their plans for returning the growth and achieving the gross margin improvement as outlined. And finally, the closure of the sale of semiconductor cryo business is weighing on us, but it is not phasing out. We are carrying more debt and interest expense, but we know this is not structurally there in the long-term and we will see the relief at the close. Brooks’ team is clear on these objectives and has a track record to deliver. This concludes our prepared remarks. I will now turn the call back over to Dave, the operator, to take questions from the lines.

Thank you very much, sir. [Operator Instructions] And first question comes from the line of Patrick Ho with Stifel. Your line is open.

Thank you very much and congrats on a nice quarter. Steve, maybe first off on the Life Sciences side of things, it was very encouraging to see the gains on the margin front and the operating model improvement. We saw the gains also coming on the Sample Management side of things. Can you I guess discuss some of the tactics there that show -- that display the improvement? And maybe more importantly, how sustainable are they? Can you continue to get more improvements over the next couple of quarters in that side of the business?

Yes, sure. Patrick, thanks a lot. Patrick, let me emphasize that we keep talking about bringing the samples in. We’ve built capability and capacity for a considerably larger business. So, we have infrastructure, people laboratory space and assets that are awaiting for better utilization. So, that's one that as we bring samples as we bring more business in the company we can accommodate. So, we'll get a lot of leverage from that, and we do believe it's sustainable. So, we got a lot of proof to continue to deliver but we're encouraged by where we are, what the action plans we have in place. And as we bring, both samples and more store business, if you will, we think it's sustainable and will continue to grow.

That's a great example.

I was just going to also supplement that on the margins traction as well. We're seeing a really nice input from the GENEWIZ business that we've taken on. But I'll also highlight, we had a half a quarter there. And so, as we move forward, I mentioned in the commentary that we have some variability on the gross margin that we foresee as we invest and then they realize revenue traction there on a cost basis. So, I want to just put it in that context, keep it in that context that 12% operating margin that business brought in, it will have a little bit of variability. I don't want people to be alarmed that it varies little lower or little higher and then lock in on that as the specific. But then, secondly, we're seeing really good inputs, but we haven't delivered as many proof points on the traction of the margin on the Sample Management side. But, we're seeing the indications of inside the business that improvements are there. And that is in the structural manufacturing of the systems. And the team is really focused and committed on seeing, those start to show up in the bottom line over the right next quarter, so very encouraged on the margin side.

And my follow-up question on the semiconductor side of things, it was also encouraging to see the activity from the Tier 2 vendors as well as the vacuum systems business that you have, but which as you noted has higher ASPs and are larger. Some of the activity in that front, I'm assuming is coming from China. But, given a lot of the market uncertainty in that region, how do you look at that business, both near term and maybe for 2019 as a whole because you provided us some support near term. But is this something that maybe is a one-time thing that you just saw this past quarter or do you believe that there's some sustainability in that business as well?

Patrick, you can imagine, we're paying close attention to this. We’re mostly encouraged by it. A lot of that vacuum systems that are going in the place are for advanced packaging applications or some of the non-mainstream applications. And you know the capability of these suppliers gets better every quarter and better every year. So, right now, they are winning applications that aren't dependent on a large memory fab or large logic fab. But, as they continue to develop more capabilities, we believe that when they are capable to perform a process to have deposition or an etch, in the Tier 1 mega factory for some of the less demanding process that we think they have a high likelihood that they win. So, we think gaining share and gaining position with them for these non-mainstream applications is valuable now and that adds large memory factories come up in China or additional foundry capacity comes up in China. These Tier 2 manufacturers as they are able to capture some of those process that we think that will drive more of our business. So, we’re encouraged by it and we think these are customers that stay very close too. We've been building this business for years and where we are starting to see meaningful volume come from this.

Our next question comes from the line of Paul Knight with Janney Montgomery. Your line is open.

Could you talk to the delays you mentioned on the storage business? You said you had a contract, was it NIH funding, was it customer specific issues? So, that's first Life Science question. And then, you had also mentioned on the life science side that you had 60 customers in Sample Management. What was that like one year ago, to give us a frame of reference?

Sure, Paul. So, let me start with the large contract. It's consumer contract, if you will. And we’re just -- we're simply waiting for samples. So, this is one that is in the books for quite some time. We -- actually as part of the obligation, we put some lab capacity in place to do sample preparation as well. So, not only did we -- are we delayed on the receipt of the samples for the start of the study, we put some laboratory capacity in place to be ready last summer and the samples just haven’t come. So, everything is still happening. So, it's not a cancelled contract by any mean, but there is certainly delay as there are number of things that go into getting a study started. But we’re pretty positive that sometime later this quarter samples begin to arrive and then hopefully we’ll not just begin to receive the samples, put them in the storage, we’ll also be able to utilize laboratory for sample prep. So, it's not a government contract, it's from a commercial enterprise, and we remain confident. The other question is on the customer count; that was particularly high customer count for us. We've been announcing -- exactly a year ago, but we are always in 20 to 30 customers per quarter capture on the Sample Management business, so that was a little bit unusually high, if you will, but we've always been doing kind of at 100 customers a year run rate in Sample Management over the last couple of years.

And then maybe this is a question for Lindon, but I'm assuming there are some costs occurring that are duplicative, as you separate the two businesses. Can you tell us what those costs are or is it just us having to assume that the outer years margins get better, but can you frame it up at all in terms of these duplicative costs that don't occur as onetimers?

Yes. I appreciate the question. So, those that are structural to our business, I wouldn't describe them as onetimers, but we have that stranded cost aspect of -- we're looking at the business of -- we have a management structure in place that managed across multiple lines. And as -- when the sale closes we look at that structure. When we have people that are not 100% dedicated to that semiconductor cryo business that we're in the process of selling, and so we don't give up that person but we'll be looking at reworking the workflow so that we bring down that. We have it inherent in our business that we look at the footprints and to reduce the cost throughout all processes, the manufacturing, the back office. So, that is our focus. So, that's one. That’s the stranded cost aspect. I’ll highlight what we shared previously is that put about $20 million of pressure on us that is still with us on an annual basis, but we'll be -- planning is in some place, the work will start I will say moving in earnest, once we close the deal, because as of now, we're still managing, in fact the more complex equation than when you run in a fully integrated basis. So, that will start lifting off, I would call it in the second half, and more substantively in 2020. Now, we have an interesting point that we just brought in GENEWIZ and the GENEWIZ business has brought in some really nice capabilities for us as well. But, of course, we're looking at that equation, what we have in our base life sciences and in our total corporate structure and how to integrate that effectively. And we’ve highlighted before, we look at some IT investment that we're putting in place that we think we will be able to bring more centralization of that infrastructure together, and it remains to be seen. But, I will tell you that both the GENEWIZ business and the business that does get [ph] built, both bring really core capabilities. And in GENEWIZ, we also have some capabilities in China in the shared service sector that we can begin leveraging in critical mass. So, we're encouraged on that side too that we can improve some gross margin. I only -- I should say operating margins. But, what I would emphasize to our investor base is that we have that in our sight as we get into the second half and into 2020. We think that starts to materialize more readily, but there is right ground there to take advantage of.

[Operator Instructions] Our next question comes from the line of Amanda Scarnati with Citibank. Your line is open.

Hi. Good evening. I just had a quick follow-up question on expected growth in semis in 2019. You spoke last quarter about approximately an 8% growth rate in semis, which is quite different than with the peers in the components base are saying. And just kind of looking off the down 2% growth in 2019, it looks that could be possible. But could you just talk a little bit about how those expectations have changed over the last couple of months? I mean, is that 8% range is still something that you view as viable? And if so, would that be more second half weighted or could you see return to growth in the June quarter, based on your current bookings and backlogs there?

Hi, Amanda. I appreciate the question. And I hope you’ll appreciate my non-answer. But, let me give it a try. Amanda, we’re really confident about the share gains about the position of the products. We have a good look on the systems business we talked about on the contamination control. It's tough for us to know because I think things have become a little bit less positive in the last couple of months, as you say. We had -- going from a 50 billion WFE to 40 or 42. That’s certainly down a lot more; if you go down there, it’s a lot more than we have forecasted. But, we are still confident. I mean, if the business is in the flat to down 5% or 10% range, we still are confident about growth. We have a number of market share wins; the semi team has launched new products to address pretty significant gains that we can get done in a relatively short order. So, the 20% would be tough to imagine, flat to down 5% to 10%, we think we’re still in the hunt. But, it's hard -- that would be hard for us to tell you where I think it's going. But, those would be assumptions that we put into place when we started growth forecast for our 2019 business. And by the way, we’re still positive about the second half of the year. But again, we don’t have too much to base it on and we do pay attention to everybody's forecast, all the equipment forecast, all the capital spending forecast, just as you do.

But then, moving into the life sciences, it looks like March quarter, the growth that we’re seeing there is also pretty much all tied to GENEWIZ acquisition. So, how should we look at second half growth? You mentioned the bookings should come back on line in the second half that were kind of delayed out. But how imperative to growth are those delays in bookings that you mentioned earlier or are there opportunities to kind of drive that organic growth rate as well?

Amanda, I'm going to start off and if Steve needs to, he could -- he’ll supplement me on this. You are right on the GENEWIZ that that's been more, obviously $16 million being added in the quarter and another half quarter being added that outweighs everything. But, I will tell you that in our guidance, we gave guidance on the Sample Management sequentially of flat to 4% growth here. And that will start to support a range of what I estimate to be about 8% to 12% organic growth. So, we think will be tipping this up to the range of the double-digit organic growth, what's trapped out as we get to the next quarter. And then, on the underpinnings of that, what we see is in that backlog, the team has secured some good wins on the systems side, which I’ve always said is the -- is what sometimes can give us a headwind versus a tailwind. But, we also have some of storage customers that are set to deliver some of samples that Steve mentioned on this call. And he’s very focused on as how many samples have we brought in every month. And so, we have a schedule ahead of us, those samples start coming in on some of those larger contracts. Those are the two places that I always anchor in on the Sample Management. It's the large system backlog and it's the momentum of bringing samples in. It's not to suggest that consumables and instruments is an important to us or post-warranty services and important. We’ve seen actually good traction on both of those over the course of the past year, but those aren't point to be -- those aren’t anchor franchises that drive the strength; it comes down to the samples we're bringing in and adding value to as well as those projects. So, we'll update you as we go into the second half. But, we're pretty encouraged in the traction that team has in hand. Our next question comes Craig Ellis with B. Riley. Your line is open.

Hi. This is actually Peter Peng calling in for Craig Ellis, and thanks for taking our question. Starting with the semi, can you just talk about your -- it seems like the tone has been more constructive. Can you talk about how that would impact your sales as ASML kind of ramps from some 18 to 30 to 40 tools?

So, Peter, it's a good question, one that we have too. What I can tell you is, wherever there are EUV tools, we have pod cleaners and now we're moving to our reticle storage, the density will be the question for us. We're not precisely sure what the ratio will be for the pod cleaners and the number of EUV tools, but the one thing that we're pretty confident about it, as utilization of those tools increases, then the number of pod cleaners and reticle stockers will increase. So, the activity, I think without question that we're seeing stepped up because of the increased activity from ASML. We don't have a good handle yet on what number of tools of ours will go with the number of tools that are shipped by ASML. So, we'll pay close attention to it. But, without question is momentum coming our way because the adoption of the technology.

Okay. And maybe just touch on also in semi, the advanced packaging. It seems like, TSMC sounds kind of bullish on the outlook. Can you talk about your exposure there and where your expectations are for calendar ‘19?

So, again, I think this is probably the only time in the last four quarters that we didn’t say it’s tough business to forecast, and I probably should have mentioned that. But, what I can tell you is that it's beyond TSMC. When all of us put tools into the info line, I think we saw a pretty significant uptick in business, but there are number of manufacturers now looking at advanced packaging capabilities, including assembly and test houses but also European manufacturers putting in some advanced packaging capabilities. So, we'll try to get a better handle on how to forecast that. But, we're seeing a broader range of customers than just waiting for a TSMC expansion of an info line. And I think it's probably borne out by the fact that if you look over the past five quarters, when we’d announced the advanced packaging revenue, it's been in the $10 million to $14 million range per quarter. And so, it's a more stable base line, if you will of opportunities that are coming from just an occasional factor.

Okay. Thanks for that. And one more question. The interest expense, just given the update and closing, what are the expectations on that line item for June and September quarter?

Our expectation is that in the June quarter, we end up closing the sale and we pay down the debt. The timing remains to be seen. And since I haven't guided the quarter, I think I’ll hold back on answering just when in the June quarter we would expect that. It's hard for us to predict what the agencies might require of us. So, that's our status at this point. I can tell you that more broadly on our debt intentions -- a couple of updates there. One, as I said, we would expect that as we bring in the proceeds that we think it's about 540 million as we've been consistent our net of tax and proceeds -- tax and fees, and then we would pay down $350 million incremental debt that we've taken on and we’ll evaluate our need to that time. As the calendar elongates, we continue to look at potential acquisitions; and if it elongates more, we might have the horizon of seeing opportunities that we keep some of it on the balance sheet, some of the debt and cash. And if not, if we don't see those opportunities in the near term, then we may pay down more of some this, upto $200 million. So, the nice thing is, it's in the solution that we have with the term structure, we have that flexibility. And then, as a final comment, I'll just -- I'll mention that we have taken the current term loan, which we did on the balance sheet of Morgan Stanley and a bridge situation, bridge to loan situation, we're now in the process of taking that just indication and we've gotten -- it's in the middle of marketing but we’re seeing pretty good support so far. So, it remains to be seen what we end up closing in the next couple of weeks, but we’re encouraged by the support we’re seeing in the debt market.

[Operator Instructions] Next question comes from the line of John Pitzer with Credit Suisse. Your line is open.

Could you maybe give a little bit more color on what you are expecting for gross margin and operating expenses for next quarter?

Yes. I can add a little bit to that. Overall, we would expect some improvement on the Sample Management side and the gross margin. But we see that in the semi side, we probably will expect the mix just to be a little bit softer. And so, overall, on the base business, we’ll expect that to soften a bit. But the nice thing is, the portfolio that we’re exercising will see one more benefit because as we bring in GENEWIZ coming in at 50% gross margin, you'll see favorability and perhaps in the range of one point improvement overall, and maybe a half-a-point to a point. And so, that's at the gross margin level. And at the operating margin level, again, I know, it remains to be seen and at that point we do have additional structured expense that we’re putting into the GENEWIZ. And while we haven't guided that line, I wouldn’t expect to see improvement. We might see a little bit lower operating margin with the investment we're putting in. And that's what's factoring into some of the guidance there. I'll highlight though, as you think about this in the gross margins, we're building a solid revenue business strong gross margins, higher growth trajectory. And this is the key to our strategy as we move into the second half. We think we're supporting a life science business that continues to expand and grow as move across these. I'll highlight that I think we're in the 14th consecutive quarter of growth, not on a year-over-year basis but on a sequential basis in the life science space. And so, we're building something that has continuous ways for growth. And so, with the improved margins, we'll get leverage out of that. And then, finally, as we get into the second half, we'll be working on the stranded costs. So, it's a really good question. We're seeing just a little softness in the operating margin in our guidance. And we'll watch that during the second quarter. And then, you're seeing that heavier interest expense that’s below those operating margin. But, we're positioning ourselves for the second half that ramps without the interest and the growth off of those investments.

And Mr. Robertson, there are no further questions at present time. I'll turn the call back to you, sir. Please continue with your presentation or closing remarks.

Dave, thank you very much. And to all of our shareholders and those listening, we appreciate your attention very much. And I think I’d just wrap up and this last question is actually good opportunity. And what you heard on the call is that you're seeing the exact effects of the transformation that we put in place over the last seven years. We really think things take different shape over the last three years with the results of what we've built into semi-around adding the contamination control capability, we've taken the Sample Management business and built it into a robust platform around the BioStorage services and now adding the additional services that we can add on the genomic analysis; it's adding value to the samples, adding value to the customers on a continuous growth. we think these last few transactions are just the transformative of establishing those two stronger platforms, that being putting us into a higher growth mode and to a trajectory and with a margin profile that will produce higher profit growth for the future as well. So, with that, I think that's the right summary to leave this call. We appreciate the support and interest. And we look forward to seeing you in our next conference. Thank you very much.

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