gs: 6/06
BROOKS AUTOMATION ANALYST MEETING FOCUSED ON GROWTH AREAS, A MORE
STABLE REVENUE STREAM THROUGH INCREASED SERVICES SALES, ACHIEVING
FULL CYCLE PROFITABLITY, AND OPTION GRANT PRACTICES. Brooks hosted an
informative analyst meeting at its headquarters outside of Boston on Wednesday, which was
focused on the company's goal of driving revenue growth, revenue stability, and full cycle
profitability. Recent scrutiny on the company's historical options granting practices was also an area
of focus during the analyst meeting. Brooks expects to drive growth to ~$1B in annual revenues
over the next 3 years by increasing its penetration in the Japanese SPE market, increasing its
penetration at large SPE makers, particularly those that have historically provided their own tool
automation requirements in-house, and by growing its services business. The company also hopes to
drive a more stable revenue model through a larger and more predictable services revenue stream.
Full cycle profitability is a focus, with the company expecting its new products to drive better
margins through lower spare parts requirements.
We provide our detailed takeaways from the meeting below:
(1) OPTION GRANT PRACTICES - Brooks has received significant scrutiny in recent weeks for
its historical options grant policies. The company addressed this issue during the meeting by
highlighting that its Board of Directors has created a special committee to review all stock option
issues, with the special committee's review nearly complete. The company expects any adjustments
to financials to impact 2005 and prior years given the vesting period of the options being
scrutinized. Brooks expects to finalize and restate its financials within the next 30-45 days.
Management will meet with the Nasdaq at the end of June as it is subject to delisting given its
delayed 10-Q filing as a result of the options policy investigation. The Nasdaq is expected to allow
the company 90-180 days to solve the delayed 10-Q filing issue before the stock is delisted. The
delayed 10-Q filing also grants the company's convertible debt holders the right to call their bonds
on July 14th if the company has not filed its 10-Q by that date. We believe the company's
approximately $370M in cash on the balance sheet should allow it sufficient leeway to cover the
potential calling of $175M in convertible bonds by bondholders. Additionally, the company has
received notification of an informal SEC review, has received a subpoena by the US Attorney, and
has had derivative law suits filed against it. Management anticipates its legal expenses associated
with stock options backdating to reach about $3-5M, some of which will fall in the current quarter.
We believe it is important to note that the current management team was not in place during the
period under question. We view this as a mitigating factor, as the current management team should
therefore not be at risk of being forced to leave the company as a result of its potential involvement
in options grant policies.
(2) PENETRATION OF THE JAPANESE SEMI EQUIPMENT MARKET EXPECTED TO
DRIVE GROWTH - Brooks views the Japanese SPE market as a significant potential growth driver
given that it is the second largest SPE market and Brooks has historically not been significantly
penetrated in this region. The company expects to gain share in Japan through its 50/50 joint
venture with Yaskawa, which was announced last month. Yaskawa is a supplier of robots based in
Japan with a significant installed base in the region. Brooks also hopes to increase its share in Japan
through its acquisition of Helix, which was completed in 2005. Helix has historically had a
significant installed base in Japan through its long-time joint venture with Ulvac. We believe that it
has historically been challenging for non-Japan based companies to gain traction in the Japanese
SPE market, but the company's joint-venture with a Japanese company should help it gain some
traction in this region.
(3) SERVICES BUSINESS ALSO A SIGNIFICANT FOCUS POST HELIX ACQUISITION -
Recall that when Brooks acquired Helix in 2005, it acquired the company's well established services
business. In 2006, management is focused on integrating Brooks' services business with Helix's
services business. Over the proceeding 3-5 years, the company is targeting doubling its services
business by leverage its AMHS and tool automation installed base. Growth in the services business
is important to the company's overall business strategy, as management believes it will offer a more
stable revenue stream throughout a full semiconductor cycle. While we agree that the services business tends to drive a more stable full cycle revenue stream, we
would highlight that SPE companies that have engaged heavily in the semiconductor services
business have tended to suffer some gross margin erosion as a result.
Management estimates that the served available market for the services business is about $150M. In
2002, Helix had about $30M in services revenues and management estimates that if Helix were a
standalone company in 2006, its services business would reach about $55M. The company divides
the services business into two areas. First, there is what the company terms the "transactional"
services business, which accounts for about 60-70% of overall services in the industry. The
transactional services business is based on the immediate need of the customer for repairs and spare
parts. Second, there is what the company terms the "controllables" services business, which is based
on defined deliverables and upgrade solutions. Management believes the controllables services
business offers higher margins and drives a more predictable revenue stream, and is therefore a
target business for the company.
(4) NEW TOOL AUTOMATION PRODUCTS GAINING SOME TRACTION IN THE
MARKET AND ARE EXPECTED TO DRIVE IMPROVED FULL CYCLE PROFITABILITY -
Brooks highlighted the traction it is gaining with the new tool automation products it introduced at
Semicon West in July of 2005. Management views the new products as important to the company's
overall business model, as it expects them to drive some margin improvement and therefore
improved full cycle profitability for the company as they continue to gain traction in the market.
Margin improvement from the new products is expected to be driven primarily by lower part counts.
New products are expected to account for about 20% of tool automation revenues by the end of
2007 and include: (1) the Marathon 2 vacuum product family, which contains integrated content
from Helix including cryo pumps and GP gauges. The company has already shipped 40 tools. (2)
The MagnaTran 8 vacuum robot family, which is targeted at large SPE makers (i.e. Applied
Materials). There are 5 new products within the MagnaTrain 8 family. The company shipped 11
units in Q1 |
