Azenta, Inc. Q1 FY2020 Earnings Call

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

Thank you. Good afternoon everyone on the line today. We'd like to welcome you to our earnings conference call for the first quarter of fiscal 2020. Our first quarter earnings press release was issued after the close of the market today and is available on our Investor Relations' website located at brooks.investorroom.com as are the supplementary PowerPoint slides that we'll be using during the prepared remarks today. Before we start, I'd like to remind everyone that during the course of the call we'll be making a number of forward-looking statements within the meaning of the Private Litigation Security Act of 1995. There are many factors that may cause our actual financial results or other events to differ from those identified in such forward-looking statements. I would refer you to the section of our earnings release titled Safe Harbor Statement, the Safe Harbor slide on our aforementioned PowerPoint presentation on our website, and our various filings with the SEC including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements that we present today. Also we may refer to a number of non-GAAP financial measures which are used in addition to and conjunction with results presented in accordance with GAAP. We believe that non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with GAAP financial results and the reconciliation of GAAP measures, they provide an even more complete understanding of the Brooks' business. Non-GAAP measures should not be relied upon to the exclusion of GAAP measures themselves. And on the call with me today is our President and Chief Executive Officer, Steve Schwartz; and Executive Vice President and Chief Financial Officer, Lindon Robertson. We will open up the call with remarks from Steve on the highlights of the first quarter and then Lindon will provide a more detailed look into our financial results and a summary of our outlook for the second fiscal quarter of 2020. And then we’ll have time to take your questions at the end of our prepared remarks. And with that, I’d like to turn the call over to Steve Schwartz, our CEO.

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

Thank you, Steve. I'd like to refer your attention to the slides on our website starting with Slide 3 and starting with the key highlights. Growth in the quarter is supported with growth in each business as Steve has highlighted. We saw a 38% year-to-year growth in Life Sciences, which includes the final quarter of the effect of the acquisition. The acquisition of GENEWIZ, which occurred in November of 2018 has been a positive addition to our portfolio profile fueling growth, higher margins and cash flow. The organic growth this quarter for GENEWIZ was 22% year-over-year. Sample Management grew 3%. The Semiconductor business is also ramping as we expected up 13% sequentially and showing 5% growth year-over-year. We didn't experience a decline in 2019 that most Semi CapEx companies did and now we've returned to the range of that prior peak, which is up 5% again year-over-year but is also 25% higher than two years ago. The increase of momentum in this period came from the record shipments of contamination control solutions to chip manufacturers and growth from vacuum robust shipments to our large OEM customers. We had 37% growth in our non-GAAP EPS year-over-year. The highlights driving EPS are really centered around the revenue growth in each business, the growth – the gross margin performance improvement in Sample Management and the profit profile which we added with the GENEWIZ business. Cash flow from operations was strong from our first fiscal quarter, when we pay out our variable compensation for the prior year. The operating cash flow was $26 million in this quarter and this followed a strong fourth quarter of fiscal 2019, where we highlighted $46 million of adjusted cash flow driven from the continuing operations. With approximately $210 million net cash available for operations and investments, we have ample cash available for taking in smaller acquisitions and sizable debt capacity if and when the next transformative acquisition materializes. Let's move on to Slide 4 to review the overall P&L in depth. On a GAAP basis, we're reporting $0.18 in earnings per share for both continuing operations and total company basis. The continuing operations is an improvement from $0.07 in the fourth quarter and from $0.09 one year ago. On a non-GAAP basis, over to the right side of the page, we have reported $0.23 of EPS, approximately the same as the prior quarter and $0.06 improved year-over-year. With strong revenue growth on both the sequential and the year-over-year comparisons, the non-GAAP gross margins were stable on a total basis. However, there are different dynamics within the segments. The 20 basis points of improvement in the year-over-year comparison reflects a significant 350 basis point improvement in Life Sciences' gross margins. This is consistent with the trajectory we had modeled for this year and our long-term outlook and should continue to perform at this level or better. We saw a 210 basis point decline in Semiconductor gross margins, significantly affected by the mix of revenue reflecting a rise in shipments to Tier 1 OEMs and less to the Tier 2 OEMS. We see the second-tier picking up in the second half. For this first fiscal quarter, 44% of the revenue for the quarter was driven by Life Sciences. So, the increase of mix toward Life Sciences and the strong performance in the Life Sciences margins lifted the company margins upward overall. If I take you to the bottom-line for a moment, over the course of the year, there is good progress evident in net income margins and EPS. But on a sequential basis, we ran into a headwind. Operating expense naturally expanded over the year with the acquisition of GENEWIZ and its related investments. But what held us back from showing additional progress in the quarter was above of approximately $2 million of expense related to some professional service fees, primarily audit and legal fees to address the material weaknesses we disclosed in December when we filed our Form 10-K. We expect this will come down in the second quarter to less than $1 million and will be behind us at the end of the second quarter. In the non-operating expense lines, interest expense came down from $5 million a year ago to what rounds to zero for the quarter. A year ago we carried significant debt associated with the GENEWIZ acquisition, but we no longer have that burden. The non-GAAP tax rate for the quarter was about 23%. This is about three points higher year-over-year and five points higher than the fourth quarter. The higher rate is driven primarily from the jurisdictional mix of our income. We continue to expect the tax rate for fiscal year 2020 to be in the range of 21% to 25%. In total, the non-GAAP net income increased 40% year-over-year and non-GAAP EPS is up 37%. While the earnings is essentially flat sequentially at $0.23, I will emphasize that the increased professional fees put approximately $0.02 of pressure on the earnings in the quarter and I expect this item to lighten by $0.01 in Q2 and to be fully behind us at the end of the March quarter. Turning to Slide 5, I will discuss our segment results starting with Life Sciences. In the first quarter, Life Sciences revenue was $92 million, up 38% year-over-year. $40 million revenue came from GENEWIZ and I'll remind you that in Q1 of last year, we owned GENEWIZ for one-half of the quarter as we acquired the business on November 15th, 2018. GENEWIZ provided 22% organic growth in the quarter. The Sample Management business provided 3% organic growth year-over-year consistent with the expectations for the slower start of the year. We continue to expect this to trend upward in the second half with stronger growth to bring us to approximately 7% for the full year. On a pro forma calculation for the full quarter, the total segment grew 10% year-over-year. And as Steve outlined, we have strengthened and invested in the sales engine and are beginning to see some fruits in the pipeline for higher growth in Sample Management in the second half and into 2021. Operating margins are on a clear path for expansion. You can see this progress is largely driven by the gross margin results. I will clarify here that the operating expense pressures in the quarter affects both segments similarly and is holding back some of the margin progress from the bottom line, which we expect to be resolved by the end of the second quarter. Driving this gross margin improvements we – was indeed the performance in the Sample Management business and the mix benefit of a full quarter of GENEWIZ. Inside Sample Management we saw another quarter of sequential improvement of more than 100 basis points which is driving year-over-year improvement of the 340 basis points on that business. Sample Management margins benefited from improved performance in the product lines of our large Twinbank store systems and also again from the growth of the B3 Cryo store systems. Looking into the second quarter, we see momentum of the Life Science business, but also take some caution on the impacts which the coronavirus may have on our revenue and operations in China. While a portion of our GENEWIZ China team has been allowed to work in supporting the critical request for battling the virus, the market inside China has broadly shut down until next week. This has had some impact primarily on our GENEWIZ business. In light of this, we are ranging our guidance for Life Science revenue in the second quarter to be $90 million to $95 million. Let me be more explicit about this. If we can recover the impact of the coronavirus, then the momentum of the business would center the guidance at the top end of the range toward $95 million. The lower end of the range accounts for some downside in the event that the problem constrains the China market longer than expected. The current midpoint is where we center our guidance, assessing a $2 million to $3 million impact from the constraints in the China marketplace. Let's turn to Slide 6. Semiconductor Solutions revenue was $119 million in the first quarter, an increase of 13% sequentially and 5% year-over-year. The increases at this point are coming from continued strength to Contamination Control solutions, primarily in our wafer carrier cleaning systems and increased demand in vacuum robots, which are shipped primarily to the Tier 1 OEMs. This ramp has not yet included any benefit of increased system shipments to the second-tier OEMs. As anticipated at the time of our Q1 guidance, this product mix does have a downward impact on the segment gross margins, which was down 150 basis points sequentially. We expect more broad-based demand and vacuum systems to begin to pick up in the second half, which will support margin improvement through the year. Looking into the second quarter, we see continued strength in vacuum robots to Tier 1 OEMs and are seeing pickup of the systems business. Overall, we expect the semi revenue to be in the range of $123 million to $130 million. Currently, we have assessed and are not expecting the coronavirus situation to have a significant impact on our Q2 semiconductor performance. We continue to monitor the situation daily. Let's turn now over to slide seven for a summary of our cash flow for the quarter. We generated $26 million of operating cash flow and $16 million of free cash flow. As referenced earlier, this is an exceptionally strong cash flow for our first fiscal quarter of the year. Over the past six months, we have generated approximately $70 million of operating cash flow from our continuing operations. CapEx amounted to $10 million for the quarter, driven primarily by investments in operations and includes less than $2 million in the initial start of the new GENEWIZ facility in Suzhou, China. The total expansion of cash and marketable securities this quarter was $11 million, bringing the total as of December 31st to $353 million. On slide 8, you will see a summary of the balance sheet. You can see the $353 million ending balance of cash and marketable securities at the top of the December 31st column. If you scan down the column, current liabilities include $93 million of tax obligations for the gain on the sale of Semiconductor Cryogenics business, which we paid in January. You can also see we have a total of $51 million of debt. So by adjusting the cash balance by the taxes paid and the debt, we have approximately $210 million of net cash for operations and investments. I'll now wrap up on slide 9 with our guidance for the second fiscal quarter of 2020. Revenue is expected to be in the range of $213 million to $225 million. Adjusted EBITDA is anticipated to be $32 million to $38 million. And non-GAAP diluted earnings per share to be $0.22 to $0.28 per share. We have factored in the current China environment for the coronavirus with expectation that most of the China economy is back to work in mid-February. In addition to this guidance, we also continue to expect a non-GAAP tax rate of 21% to 25% for the year. This now concludes our prepared remarks and I'll turn the call back over to the operator to take questions from the line.

Thank you. We have a question from Paul Knight with Janney Montgomery. Please go ahead.

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

Hi, Mike, thank you very much.

On the sample management side, that has clearly been the most volatile segment we've seen. Steve, can you share what gives you confidence and visibility to anticipate a continued ramp-up in the upcoming quarters and achieve that 7% growth for the year?

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

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

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

Thanks for the time, guys. Appreciate it.

Thanks, Mike.

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

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

Yes, thanks John. That's something we consider every day. Let me explain. There are a couple of factors driving the general growth of our business, regardless of whether the growth rate is 10% or 20%. In foundry, as we move from 10-nanometer to 7-nanometer, to 5-nanometer, and ultimately to 3-nanometer, the content related to Contamination Control continues to increase. It's not exponential, but definitely multiplicative in terms of the number of tools and content we have as the device node shrinks. Even maintaining a consistent foundry spend year-over-year, moving from one node to the next, would naturally boost our business. For example, if TSMC had a flat capital expenditure while transitioning from 7-nanometer to 5-nanometer, that would still represent an increase for us because they would use more of our cleaning tools. Similarly, the increasing complexity of the device spend for vacuum processes in advanced deposition and etch steps, along with a higher count of those processes, contributed to our growth during 2017, 2018, and 2019 despite challenges in the semiconductor environment. We expect these trends to continue into 2020. That said, I can't specify whether growth will be 10% or 20%, but if it is 10%, we expect to outperform that. If it is 20%, we would also anticipate outpacing that for the same reasons.

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

Yeah, John, that's a really good question. Due to the significant spending in foundry, we have a lot more confidence. If foundry spending decreased and we were limited to the non-high-end foundry sectors, we would likely be closer to the industry performance, although we still expect to perform better than the industry. This is how we approach the situation.

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

We assess our supply chain and believe we are well-prepared for the quarter, so we do not foresee any major issues. While China may have some effects, we think we've handled those adequately. The only unpredictable factors could arise if a fab doesn't accept products or if a different supplier is restricted from providing a critical subcomponent, preventing an OEM from shipping for unrelated reasons. For instance, an OEM might not require our robots if they are facing other shipping challenges. Currently, our semi forecast appears robust, and we haven't factored in much risk related to coronavirus, but we are monitoring the situation closely. We feel confident about our supply chain, but challenges could arise if a customer is unable to operate a fab for tool intake or if another supplier struggles with their components, potentially disrupting the OEMs, which would affect us.

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

I'll add to that. As you know, Steve is closely managing Sample Management now, so I'll let him speak as well. Our main dynamic, as we've mentioned before, is essentially twofold. First, the growth of GENEWIZ helps improve gross margins naturally. This last quarter benefited from a mix due to the year-over-year contribution of the incremental acquisition. Next quarter will provide a full year-over-year comparison on GENEWIZ's mix. The growth trajectory has been over 20%, which offers a favorable mix benefit. Furthermore, and even more significantly, we've witnessed an opportunity for improvement in Sample Management. Within Sample Management, the focus has primarily been on product shipments rather than services, which have remained stable with good margins. The significant aspect here is the product shipments. This includes costs related to materials, but more importantly, quality and labor costs associated with quality and project management. We have successfully managed to reduce a considerable amount of costs in this area. As previously shared, when Steve stepped in, we brought a senior executive from our development quality team, who had previously influenced our Life Sciences business, especially during the initial phases of our Cryogenics-based semi business. He is now fully dedicated to Sample Management, focusing on quality and applying those semi disciplines. We are already seeing the results of his actions, and we believe there are still more opportunities to be realized. We are observing better traction. It's important to emphasize that we've achieved significant improvements in large systems. Additionally, we are seeing positive results as we ramp up the B3 Cryo system, driven by the size of that business and enhanced margins, rather than simply cost reduction. Both factors are expected to continue benefiting us. This territory is not entirely new to us; we were above 40% three years ago but faced challenges since then. However, we are now confident in our trajectory for the rest of the year, with expectations to remain above 40%. As Steve pointed out, we have reached over 41%, and moving towards 42% to 44% next year seems quite achievable for us.

Thanks, guys.

Yeah. Thanks a lot, John.

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

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

Yes, Craig, thank you. Currently, spending on CCS is primarily focused on foundry, with little activity from memory at this time. We will take that into account in our analysis. We do expect that some of the vacuum automation systems we are shipping may relate to memory, but it's challenging to confirm. Nonetheless, a significant portion is coming from foundry, and our customer base for CCS products now includes over 70 different clients. We anticipate that as memory spending increases, there may be a shift from foundry to memory. However, at this moment, it appears that foundry logic spending remains the dominant factor.

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

We're currently experiencing a good ramp in our operations and are not facing any constraints. If our business volume increased by 30%, we'd likely be able to grow accordingly. We have a strong supply chain and a reliable partner in contract manufacturing, which has performed exceptionally well. A year ago, we wouldn't have expected to reach these levels, but our preparation has put us in a good position. We feel comfortable with our current capacity, but we are always considering how to handle future increases in demand or capacity needs. While we do have some flexibility to expand, it won’t happen immediately, and for now, there is no urgency to make quick changes. We believe we are set for the current quarter, allowing us some extra time to explore options for adding more systems if necessary.

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

Sure, Craig. I want to share a couple of insights, one from GENEWIZ and another from the Cryogenic side. It's interesting to note that we're recognizing the same customers across these segments, and we foresee some future convergence of opportunities in the research and Sample Management areas. We're particularly proud that GENEWIZ has developed a proprietary technology focused on a specific virus, the AAV ITR, which is crucial for research in the cell and gene therapy domain and is notoriously difficult to sequence. This construct is essential for delivering therapies via virus, and GENEWIZ offers a unique method to read it, which is a first in the industry. They beta-launched this last summer and the response has been overwhelmingly positive, with many enthusiastic participants. We recently expanded this offering beyond the U.S. into Europe and China, where the reception has also been strong, leading to an influx of customers to GENEWIZ. When we reference our significant customer acquisition, it's worth noting that it's not just organizations like the CDC that are aware of what GENEWIZ can do; it's also the research community in this field. While it’s challenging to estimate the full scope of opportunities, we know that billions are invested in cell and gene therapy research. The GENEWIZ team is dedicated to enhancing their support capabilities. If you mention AAV ITR sequencing to industry professionals, they'll tell you about its complexities and necessities, but many may not realize GENEWIZ’s unique sequencing capability. We're excited about this advancement. On the Cryogenic side, we're gaining a better understanding of the scientific requirements and building new skills within the Cryo team. In the first quarter, we made progress with CAR-T immunotherapy leaders in the market, shipping an initial store to one customer and a follow-on store to another. These customers are very interested in our product line for their R&D and quality control needs concerning approved gene and cell therapies. This focus is essential for constructing a complete manufacturing cold chain cycle. Although our early products largely relate to autologous immunotherapies, there's ongoing R&D into next-generation allogeneic therapies, which is driving the expansion of our Cryo systems. Clients need to not only preserve samples but also develop methods to handle them appropriately to satisfy FDA GMP requirements. We’re enthusiastic about this progress; each customer presents significant demands that we are committed to addressing. As we move forward, we recognize considerable upside potential within the company. While I can't provide a specific number, our initiatives align well with the growth and development needs in this sector.

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

Sure. Right now, I expect our margins to remain stable on a sequential basis. In Semiconductor, although we're starting to see some improvement in systems, it isn't as widespread, particularly in backroom systems, as we anticipate for the second half of our fiscal year. When that resurgence occurs, we expect our gross margins in Semiconductor to return to the levels we experienced last year. In Life Sciences, while I foresee some additional benefits in Sample Management, overall, we're planning for slightly above flat and stable gross margins. There is some uncertainty regarding GENEWIZ, particularly concerning the impact of the coronavirus on our operations in China. Therefore, we're being cautious yet responsible in our guidance about maintaining flat margins.

Thanks guys.

Thanks Craig. Appreciate the attention.

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

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

This highlights what's occurring in Indianapolis. We are finalizing the last phase of our warehouse expansion. To provide some context, our warehouse is located in an industrial area close to the airport, which is a favorable location. We've had the opportunity to expand into additional areas of the building and have recently completed some improvements, including electrical upgrades and air conditioning, which contribute to a 20% increase in capacity. Since acquiring the facility in 2015, we have nearly doubled its footprint. This latest step is part of our annual growth strategy. I often describe this as variable capital expenditure; we invest in upgrading the space but only install freezers just before we expect incoming samples. We typically set up some freezers in advance of demand, which is why you might have seen pictures of empty racks with electrical setups ready for freezer installation. Our approach is to minimize idle freezers, as they are set up just ahead of demand. Thank you for your interest in this aspect of our operations.

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

I believe that, first and foremost, we haven't encountered anything that would alter the viewer trajectory we set for the year. Historically, as we've mentioned, we received positive verbal indications before our Investor Day about the semi market, particularly with a robust order load in September focused on contamination control, which provided us clarity for future customer discussions. Although orders usually come in the quarter prior for semiconductors, the data indicated a strong first half guided by contamination control, and we were excited to see the ramp-up in September and again in December from Tier 1 OEMs, validating market trends. Additionally, we had indicated that we didn't expect the systems business to recover until the second half of the year, potentially beginning to show improvements in the March quarter, and this is indeed what is happening. We have confidence in this trajectory. As I mentioned in response to a previous question, we anticipate improved margins in the semiconductor sector during the second half, driven by the systems business and our broader customer base, which will enhance gross margins, particularly in contamination control and especially around systems. Regarding the Life Science sector, while we foresee a temporary pause due to the coronavirus in the second quarter, we believe this won't significantly impact the year. If our outlook holds, we are optimistic about GENEWIZ's continued strong performance, projecting 20% growth for the year. We're also seeing momentum in the developments mentioned by Steve, such as AUV ITR capabilities, the reliance on GENEWIZ by CDC organizations, and the increasing criticality of this business, which is strengthening our relationships and opening doors for more institutional engagements. In terms of Sample Management, we remain on track, with gross margins exceeding our yearly average targets even in the first quarter. Our margin profile is sound, and as we have gained traction in our opportunity pipeline, we expect to capitalize on the developments highlighted by Steve, particularly in cell and gene therapy and the B3 Cryo momentum. Overall, we are aligned with the growth trajectory we discussed, and aside from a couple of challenges, namely the coronavirus and higher operational expenses in the first half, we anticipate that the second half will see significant growth, and I don't see any reason to adjust our forecasts.

Got it. Thanks Lindon.

Yes. Thank you.

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

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

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