Ladies and gentlemen, thank you very much for standing by, and welcome to the Brooks Automation Q3 2018 financial results call. During the presentation, all parts will be in a listen-only mode. Afterwards, we will conduct a question and answer session. If you have a question, please press the one followed by the four on your telephone keypad. Should you require operator assistance at any time, please press star zero. As a reminder, this conference is being recorded today, Monday, August 6th, 2018. I would now like to turn the conference over to Lindon Robertson, Chief Financial Officer. Please go ahead.
Thank you, David. Good afternoon, everyone. We would like to welcome each of you to the third quarter financial results conference call for the Brooks fiscal year 2018. We will be covering the results of the third quarter ended on June 30th, and then we'll be providing an outlook for the fourth fiscal quarter ending September 30th, 2018. A press release was issued after the close of the markets today, and it's available at our investor relations page of our website, brooks.com, as are the illustrated PowerPoint slides that will be used to support our 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 Securities Litigation Reform 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 the various filings with the SEC, including our annual reports on Form 10-K and our quarterly reports on Form 10-Q. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. I would also like to note that we may make reference to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP. We believe that these non-GAAP measures provide an additional way of viewing aspects of our operations and performance.
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 third quarter highlights. We'll provide an overview of the third quarter financial results and a summary of our financial outlook for the quarter ending September 30th, which is our fourth quarter of the fiscal year 2018. We will then take your questions at the end of those comments. During our prepared remarks, again, we will, from time to time, make reference to the slides I mentioned, available to everyone on the investor relations page of our Brooks website.
With that, I 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 have the chance to update you on the results of yet another strong quarter. Before I begin with my prepared remarks, I'd like to set the stage with our view on the current business environment. We're at one of those moments in the semiconductor equipment industry when we resurrect all of the uncertainty vocabulary that includes words like pause, slow down, push out, dip, and many others. These times are part of the nature of the semiconductor equipment business, and they're common to all of us who supply the industry, and we'll deal with any situations we have in the past.
What we are certain of is that we've built the semiconductor segment of our business to be able to quickly react to perturbations and to be able to ramp up and down in short order. These days, our supply chain is conditioned to support this environment, and it's an asset rather than a liability. Also, we're confident in our market share position and that the investments that we've made and are making are securing our position so that subsequent growth in the semiconductor business will deliver even greater growth in our business. I want to emphasize that we do not know more than our customers about the length or depth of any reduction in business that's occurring now.
It's exactly in this kind of uncertain semiconductor business environment that I want to emphasize to you the value of our portfolio. For the past four years, we've been in an environment of unprecedented, uninterrupted growth in the semi-cap equipment space, one during which all participants in the market have been beneficiaries of the acceleration of the data economy. In the midst of this period, we invested in and retooled our semiconductor product portfolio, we aggressively invested in the development and growth of a life sciences business.
Our strategy in semiconductors has been to double down in high-growth segments, which has resulted in strong growth and exceptional operating performance. The addition of Life Sciences was deliberate and focused, growing out of the core technologies embedded in our semiconductor business and funded from the profits of that business. We are now seeing the fruits of our investments as we've added a substantial growth vector and market diversification, which is providing a buffer from the full impact of the CapEx volatility that's behind the strong semiconductor market. We do forecast somewhat lower revenue in the September quarter, but growth in Life Sciences and steady performance from some of the diversified sections of our semiconductor business will allow us a much smaller decrease in our business than we would have seen absent the changes we've made to the company since 2014.
For now, I'll direct my comments toward highlights from our third quarter and how we see business shaping up in the September quarter. In our Q3, we demonstrated more of the growth and earnings power that we're building in our business. Revenue increased 8% sequentially to $223 million, and that's up 23% from one year ago. Earnings increased to $0.46 per share, an amount essentially equivalent to our earnings for all of fiscal 2015. Our customer capture and design win activity continued as we added 40 new customers in Life Sciences, and we secured another 22 new design wins in our semiconductor space. We're investing in high growth segments of our markets and delivering outsized growth and more profit as a result. We intend to continue on this course, adding new capabilities to the company to further sculpt our portfolio to support these high growth vectors.
I'll provide some highlights from the quarter for both businesses, starting with Life Sciences. Life Sciences revenue came in at $50 million, up 35% from one year ago, and at $146 million year to date, has almost reached our Life Sciences revenue for all of fiscal 2017, and clearly supports our greater than 30% growth target for this year. There are a few noteworthy accomplishments that I'd like to highlight. Our growth was led by storage services, which increased 44% year-over-year. Organic growth of 22% shows the steady beat to the continued services opportunity that we've described to you. Our PBMMI and BioSpeciMan acquisitions are also contributing as expected and are proving to be solid additions to the portfolio.
Revenue from our stores and consumables and instruments businesses were solid and each contributed organic growth in the high single digits %, leaving our overall organic Life Sciences growth at a healthy 13%. One area of particular note is the performance of our cryo store business. We expanded the customer base and our global footprint, and we're beginning to see orders and quote opportunities for customers who are looking to purchase multiple systems, as the capabilities that we've developed are proving beneficial for the cell and gene therapy markets. Specifically, we've now shipped B3C systems to more than 40 customers in 14 different countries, and meaningfully, seven of these customers have now purchased multiple units. The customer distribution consisting of big pharma, biotech, government, and academic and pure research institutions, plus clinical customers who will look to qualify this technology for patient care.
To date, the qualification process has been slow and deliberate, but we're now beginning to see the signs of adoption that are associated with the diffusion of innovation in a market, and we look forward to continued positive momentum in the cryo space, especially cell and gene therapy applications. Notable among our wins were two cell and gene therapy companies, both focused on breakthrough therapies to treat complex cancers. In addition, we continue to expand our solutions into the consumer genomics space, as we're now partnering with a large commercial genomics company to provide a comprehensive suite of automated storage, consumables, and instruments. As you can tell, we're in a high growth environment. We've had much success in market capture, but to date, we've had less success driving the profitability that's absolutely inherent in this business. Specifically, we've not yet made the progress on gross margin improvements that we'd anticipated.
The issues, primarily in systems, are understood and are being addressed. That said, we're bullish about the market momentum that's behind the need for our offerings, and in particular, the number of new customer wins we're generating. The seemingly insatiable demand for fully annotated, high-quality biosamples puts us exactly in the center of a tremendous business opportunity that we see remaining robust for many years to come. We offer a portfolio of products and services that adds more value to these samples, including consumables and instruments and lab services for sample formatting, informatics for sample inventory and patient consent management, transportation services, and genomic analysis, to list a few.
We are pleased with the organic growth in the number of samples we have under storage, and we continue to look for acquisitions that will add more samples under management, as well as additional services that increase the value of these samples. We have a rich target pipeline of candidates, and we're confident in our ability to integrate and assimilate these capabilities into our Brooks offerings. We reiterate our commitment to the long-term growth of the opportunity and our ability to create tremendous value in this space. I now turn to the semiconductor business, which delivered another strong quarter. Revenue at $174 million was up 9% sequentially and 20% year-over-year. We saw particular strength in vacuum automation and advanced packaging, but also the beginning of a rebound in contamination control, which we had forecasted.
We had another record quarter in vacuum automation, led by vacuum robotics for deposition and etch products. Vacuum automation products, which include vacuum robots and fully integrated vacuum systems, was up 4% from the March quarter and 26% year-over-year. In particular, vacuum robot revenue set another record with 20% growth over the March quarter, while integrated vacuum systems was down slightly. In the quarter, we had nine new vacuum automation design wins across the spectrum of tier 1 and tier 2 OEMs, and for various applications, from front-end deposition and etch to advanced packaging. That said, consistent with reports from other semiconductor capital equipment suppliers, we do anticipate some slowing in this segment in the September quarter as tier 1 robot demand subsides. Our integrated systems business forecast, which largely supplies tier 2 and non-U.S. customers, is expected to be relatively stable quarter-to-quarter.
In any case, it's important to note that we're a robot development machine. Our design win and new business capture has never been at a higher level. We believe that our vacuum robot capabilities are now, more than ever before, demonstrably better than any competing product, merchant or captive, and that the value we're delivering is being recognized by all of our customers and potential customers. In advanced packaging, we had another record quarter as revenue jumped to $16 million from approximately $12 million in the June quarter, bringing our three-quarter total to $42 million, just $4 million shy of 2017's $46 million. We had another four new design wins in the quarter that continue to improve our position as the preferred supplier for automated solutions for advanced packaging.
I remind you that there's much variability in the handling requirements of many different complex substrates that exist in the advanced packaging world. We are winning because we have the engineering talent and flexibility of controls design to be able to adapt to the newest challenges in advanced packaging. These changes are frequent and many. That said, we continue to note that it's difficult to forecast this segment. We do see expansion in the number of advanced packaging factories that are starting, in addition to growth in the number of equipment companies that are serving this segment. We remain bullish about the growth potential in this segment, which is now close to 10% of our semiconductor revenue. In our contamination control business, we saw another quarter of growth, albeit modest. We do feel that business is on the upswing.
Revenue came in at $21 million, including $4 million contribution from Tec-Sem, which we acquired at the beginning of the June quarter. The contamination control business has its own cadence. Four years ago, the business was almost completely dependent upon Tier 1 foundry business. Although it still represents a meaningful portion of this business, we've expanded into Tier 2 foundries and memory fabs, giving us more breadth of application to a larger customer base. This dynamic has served to both grow the opportunity and simultaneously diminish the volatility of this segment. Furthermore, the addition of reticle management solutions adds yet another capability to our mix. EUV on the horizon, we plan to add value with technology we've developed to serve this new application.
Even with some fab activity slowing, we see our contamination control business increasing modestly in the September quarter, with contributions coming from both carrier cleaning and reticle management solutions. When we put it all together, we forecast our semiconductor business to be down approximately 10%-12% in September. We do not have much visibility into December. We're encouraged by the industry commentary that the September quarter may be the low point for equipment spending. In view of what seems to be a short-lived, slower period in semiconductor equipment purchases, we are not scaling back on our operation spending nor on our R&D activities, as we believe it's important to continue our momentum. In all, June was a tremendous quarter and is a testament to our execution of the roadmap that we're following to grow in two strong markets with exceptional products and technologies.
Our operating performance continues to improve, and we know that we still have more room to deliver higher profitability without sacrificing growth or share positions. We remind you that we're taking the appropriate actions for the long term. We're gaining share and increasing our technology lead in semiconductor. In life sciences, we're building unique capability around emerging needs in the marketplace, and we're in the early innings of a very long and substantial opportunity. We're confident in our ability to execute on these opportunities which we've created for ourselves, and we look forward to demonstrating that to you in the coming quarters. That concludes my formal remarks, and I'll now turn the call back over to Lindon.
Thank you, Steve. Please refer now to the PowerPoint slides available on the Brooks website under our investor relations tab. We begin with slide three, which is a consolidated view of our third quarter operating performance. Our top-line revenue grew 8% sequentially to $223 million. This represents growth of 23% year-over-year, with organic growth of 14%. Both segments drove the growth. Sequentially, semiconductor solutions expanded 9% and life sciences 2%, which was the 12th straight quarter of sequential growth for life sciences. On a year-over-year basis, semiconductor grew 20%, while life sciences grew 35%. Inside this growth, semiconductor solutions had organic growth of 15%, and life sciences had organic growth of 13% year-over-year. In the GAAP results, despite absorbing step-up charges and increased amortization of intangibles from the acquisition of Tec-Sem, we still saw operating margin expansion.
Below operating margins, the line items are flat except for tax. In the second quarter, we reversed the valuation allowance reserve on the deferred tax assets, which drove the large tax benefit and high earnings per share in that prior quarter. Let's turn it over to the non-GAAP results on the right side of the page. Non-GAAP gross margins came in at 41%, which was 20 basis points below the second quarter result. This reflects semiconductor margins of 41.7%, which improved 20 basis points sequentially, offset by 170 basis points decline in life science margins at 38.1%. We will cover each of these as we get to the segment pages. The modest 3% sequential growth of non-GAAP operating expenses is largely driven by the additional operating expense of the two acquisitions completed in the quarter. Non-GAAP operating margins expanded approximately 80 basis points.
If we look back to the year-over-year comparison, this non-GAAP operating income result was up 32% on the 23% revenue growth. The non-operating section of the P&L was consistent with last quarter's results. In summary, the sequential revenue growth of 8% and modest expansion of OpEx provided leverage for increased profit margins. We saw non-GAAP net income and earnings per share growth of 14% compared to the prior quarter. Let's turn to page four to begin discussion of the segment results. In the third quarter, life sciences revenue was $50 million, which was an increase of 2% sequentially. This marks the 12th consecutive quarter of sequential growth, this time driven by storage-related services and the BioStore III Cryo sales. On a year-over-year basis, life sciences grew 35%, and again, including organic growth of 13%.
Life Sciences adjusted gross margin in the third quarter at 38.1%, was down 170 basis points from the prior quarter. Margin performance in the quarter was negatively affected by the higher project costs in large storage systems. Achieving consistent gross margin performance in Life Sciences is taking longer than expected. I would like to provide additional color to this. I will do this in the context of the 2 primary expected drivers of improvement. First, in large storage systems, over the past 2 years, we've made significant progress in supply chain planning and reducing fixed structural costs. The remaining steps to yield the targeted improvements include engineering redesign for higher throughput of modules, project labor efficiency, and freight optimization. We've not yet seen benefits anticipated in implementing the lean principles against each step. Our large system gross margins continue to be short of our roadmap objectives.
We see these improving in Q4 and continuing to contribute positively into 2019. The second area of anticipated improvement was mix. We are seeing progress in the mix of profitable revenue streams. In this third quarter, compared to our fiscal 2017 full-year results, we've increased the mix of sales and high-margin offerings up about 4 percentage points, contributing 1 point of gross margin improvement. We expect this to continue as we expand storage services, BioStore III Cryo sales, 4titude consumables and instruments, and software sales. In summary, our continuing efforts have the potential to contribute significant gross margin improvement to the overall Life Sciences segment. We also see mix continuing to progress. The Life Sciences segment has a roadmap to return to 40% non-GAAP gross margin in the fourth quarter. A longstanding target we have identified for the fourth quarter has been 10% in operating margins.
To get there, we foresee the 40% gross margins, a modest drop in operating expense spending due to further integration efficiencies, and a pathway to $53 million in revenue. The benefit of leverage at the operating income level is significant. With a $53 million of revenue combined with the improvement in store systems, we expect operating margins to reach the 10% target. Our range of revenue expectations is $51 million-$53 million. We see the 10% operating income goal as aggressive but achievable. Let's turn over to the semiconductor business on slide five. Semiconductor Solutions revenue increased $15 million or 9% compared to the second quarter. As Steve has highlighted, the Tec-Sem acquisition brought $4 million of the expansion. The other $11 million was driven by growth in vacuum robotics, advanced packaging system, and contamination control.
In total, the $174 million of revenue is 20% higher than 1 year earlier, with the organic growth of 15%. The Semiconductor adjusted gross margins were up 20 basis points at 41.7%. The operating income results of $36 million and 20.5% is about 200 basis points above the same quarter 1 year earlier. Let's turn over to the balance sheet on page six. The change in goodwill and intangibles was driven by the acquisition of Tec-Sem and BioSpeciMan. The $19 million increase in net working capital was largely driven by accounts receivable consistent with the growth of sales. We ended the quarter with $232 million in cash equivalents and marketable securities. Over to slide seven. Operating cash flow in the quarter was $19 million. It was a normal quarter for CapEx of $3.6 million, bringing the third quarter year-to-date to less than $10 million.
After the payment of $18 million for acquisitions and $7 million paid in dividends, the total of cash equivalents and marketable securities at June 30th again stood at $232 million, and we have zero net debt. Let's turn over to slide eight. For the guidance of our fourth fiscal quarter, revenue is expected to be in the range of $203 million-$213 million, adjusted EBITDA is anticipated to be $38 million-$45 million. Non-GAAP earnings per share is expected to be $0.35-$0.43 per share. That concludes our prepared remarks. I'll now turn the call over to the operator, David, to take questions from the line.
Thank you very much, sir. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. Lastly, if you're using a speakerphone, please lift your handset before entering your request. Next question comes from the line of Paul Knight with Janney Montgomery Scott. Your line is open.
Hey, guys. This is actually Mike Gokey on the line for Paul. Congrats on the quarter, first of all, can you speak to the 13% organic growth rate in the third quarter? What are the drivers behind the slowdown? Is it customer delays, tougher comps, et cetera? Thanks.
Yeah. Hi, Mike, it's Steve. As we tried to articulate, the sample storage growth is still pretty high, 22% organic on the sample collections. The stores and the consumables and instruments, although pretty healthy, all of those businesses were about the 7% organic range, it held it down to about 23. The samples we pay really close attention to. The stores made good progress, in the aggregate, it's 13%, which we still see as really good. Again, the samples were 22% and consistent with a really healthy growth in the biostorage and storage-related businesses.
Okay. Thank you.
Ladies and gentlemen, as a brief reminder to register a question, it is the one followed by the four on your telephone keypad. Our next question comes from the line of Edwin Mok with Needham & Company. Your line is open.
Okay. Thanks, guys, for taking my question. Steve, thanks for the long list of fancy word we sell side use to call the near-term environment in the semi-cap space. First question I have on the semi-cap space, just to be totally clear, how much of your guidance comes from the Tec-Sem acquisition?
Right now, we put just over $5 million in for the quarter for our best estimate.
That's helpful just to baseline that. Even if I back that out, it seems like you are performing actually quite well in semi-cap space, better than some of the peers that we've seen, right? Is it just because of this kind of exposure outside of the tier 1 OEMs, or you have some clear remarks on that. Is there any other driver that enables you to have basically a better performance than your peers?
Edwin, let me nail this so that you can get anchored to something. On the vacuum robot business, that goes exactly as you heard from tier 1 OEMs. That drop is really consistent with what you heard from the tier 1 players in the 25%-ish range, 25%-30% quarter-over-quarter drop. I suppose the thing that's probably most reassuring for us there is when you imagine if tier 1 OEMs held a lot of inventory, that could have been worse, but it feels really consistent with their shipments and revenue. On the vacuum systems, those are tier 2 and a lot of advanced packaging applications. As I mentioned, the contamination control is a little bit out of step.
I'll give you an example in the quarter, from a contamination control standpoint, we had one foundry, two wafer makers, and eight memory customers in the quarter, and we're seeing that kind of pattern, this variability pattern going forward. We saw some growth in the June quarter. We see a little bit more growth in the September quarter, again, because of the portfolio that we have. As you imagine, vacuum robots right with the tier 1 OEMs, but the variability in the other businesses is giving us a lot of good support in semi.
Steve, any color you can provide or any thoughts you have on the December quarter that you can talk about?
No, I wish we could tell you, Edwin, we hope that September's the low point, but we'd be irresponsible if we made an estimate out in December right now.
Okay, that's fair. I totally understand the limited visibility part of it. On the life science side, actually, Lindon was very helpful on the color on the margin side. Just curious, is there a way to think about kind of gross margin on your mix? If you kind of break it down between storage system or storage versus consumable versus service, right? Is there a way to think about which part of your business has higher margin versus the other and maybe that will help us to think about long term how your margin can trend?
Yeah. Edwin, I've long said that we have the higher margins on the storage-based services and the lower margins on the large systems, that continues to be the case. I threw in some additional color in my remarks to give you an indication. We have higher margin and higher margin outlook going forward in the long term around the cryo systems, around some of the consumables and instruments, around the software sales. We have to get those software sales ramping further. All of this is going to be contributing nicely. This is what we're really satisfied about is that, obviously we're not looking for the large systems to drag, and they're not. In terms of growth, we see really high propensity for the continuous expansion of the platform that's really anchored around storage services, helping in the market as well with the software.
As we work closer and closer with enterprise-level relationships, the software is resonating much more as they look into our inventory that we're holding on their behalf, I should say, their inventory, which we're holding on their behalf, also that enterprise inventory that they're holding in multiple locations. We're seeing some traction there. We've seen a little bit of traction on the FreezerPro assets that we acquired last year, which is contributing nicely. It's a little add every quarter. Then the 4titude acquisition is bringing nice margins. Hopefully that helps with the color. The big anchors in the portfolio, as we've long said, when you think about those cornerstones, the storage services, think of it in the 45% range typically, in the systems, 35% on most days.
This past quarter, we had a little dent on that, and we expect it to be improving in this next quarter and being back to 40% as I outlined.
Okay, great. One last question I have. I assume all of these wouldn't cause you to make any change to your long-term target. I think 2021 target model is what, 18% CAGR and then 20% op margin for the life science side. Should we still stick with those targets?
Yeah, we really believe so. In fact, if they just go down the P&L, we have a revenue traction. We think we're going to grow faster than 30% that we outlined this year from the beginning of the year throughout. We think we're on track for this year. We think it sets us up for the $240 target next year. Then on the gross margin, we'll be up above 40% next year. We said 42%-44%. I completely acknowledge that our gross margin traction has been less than we expected, as we acknowledged here. I think that's the line item to watch, but we think we have the roadmap to get it to 40% and get on up to the 42%-44% next year, then onward toward the 2021 target.
Yeah, we have a lot of confidence in the model, and that mix aspect that you highlighted is one of the most reassuring elements, not because we don't have confidence in the system, but because the mix is really the expansion of the platform just the way we thought it would be.
Great. That was extremely helpful. That is all I have. Thank you.
Thanks, Edwin.
Our next question comes from the line of Amanda Scarnati with Citi. Your line is open.
Thanks for taking my question. Can you just start on the semiconductor side? Remind us what the order momentum was throughout the quarter. Remember last quarter you had very strong orders.
Okay.
Can you just talk about how that translated to revenue this quarter, or when you expect to see revenue from that, and how you were able to manage that throughout this quarter?
Yeah. Amanda, I appreciate the question. Steve and I talked about that this quarter, and you'll notice that it was absent in our earnings release, and we didn't comment on it. Let me just make a clarifying comment here. One, let me just start, the bookings have been pretty consistent with what you expect in the industry, but also with our trends so far, and we had nice add to our Life Sciences bookings, and so I'm just going to give you the general color. Now I want to comment that we've decided to drop sharing the bookings and the backlog, except on a periodic basis, we may update people on backlog on the Life Sciences business. It depends how meaningful that becomes. The reason for this is we just continuously see less, I'll say, connection to the short-term forecast.
As you know, on semi, we have the next 90-days forecast, and the supply chain tightness has put orders on us sometimes. In the short term, we've been able to deliver revenue without the orders, as you saw this quarter. I would just highlight to you that the more we've explained it, the more convinced we've become that it's not as meaningful as an indicator. We've decided not to continuing publishing that on a quarterly basis.
Okay. In terms of China, can you just remind us about the growth opportunity in the Life Sciences business there, and what your expectations are on Life Sciences? Separately, can you just talk about the tariffs and any impact that you're seeing in either the semiconductor or in the Life Sciences business? Thanks.
Sure. Amanda, the life sciences opportunity is pretty significant. What we find is that the breadth of the offering that we bring, the biostore, the large automated biostores, as well as the automated cryogenic systems, are being readily accepted in China. We have a strong presence there from no business to about an $8 million business this year, and we anticipate next year that we'll go up considerably more. As we win opportunities, we'll be able to articulate those to you. The opportunity you would imagine from 2017 to 2018 is kind of a double, and maybe that same kind of opportunity on a trend for 2019. We're learning the territory. We're starting to get extremely well connected into the networks of people who are making decisions in China.
What we find is that a single penetration then sets us up for expansion from Beijing or Shanghai area then into other provinces, and that's what we hope to benefit on in 2019. As we win that business, we'll be really clear with you about the potential. What we do see, it is, without question, on a percentage basis, the fastest-growing opportunity. The amount of acceptance that we've seen is really exceptional so far in China.
Good. Tara. Ladies and gentlemen, as a brief reminder, in order to register a question, it is the one followed by the four on your telephone keypad. Our next question comes from the line of Craig Ellis with B. Riley FBR. Your line is open.
Yeah. Thanks for taking the question, congratulations on the financial performance in the quarter and the detailed and candid remarks on life sciences gross margin. Just related to that point, Steve and Lindon, can you just walk through some of the milestones for software sales ramp? Not so much in the next quarter or two, and not looking for guidance, but just from a milestone standpoint, as we look out through 2019 and into 2020, what are the big things that we're looking for since that's such a significant potential gross margin driver?
Yeah. Craig, I don't want to overstate the software because we've not put a number on those targets for you. We have, obviously, Dusty, and we have some modeled in, but I think it's premature for us to put targets out there and track toward. What we have seen is expansion this year over 2017, and we expect it in 2021 to be contributing more so. I think it would be a misalignment of clarity in terms of us projecting for you a 2019 milestone to get there. What I would look for is, as we get closer to 2021, we'll start shedding more light on that.
I've often said to date that it's probably early to start modeling, but if you were to start putting 2%-5% of our revenue and software out to 2021, I don't think you'd be far off, and that's pretty low. The 2% and 5% starts to be pretty significant at the margin level. We're going to temper that in a very broad range, and I appreciate the question and the interest in it because we do think it helps in the flavor of the mix. I think what's more important to see is that we are becoming an enterprise solution for our customers, both on the storage, on-site, off-site, and an accelerator for the research in that we're helping to bring quick access to those samples, whether they are on-site or off-site. That software starts to become part of that solution.
I know I'm avoiding a very specific answer, but I think it's the right answer for analysts right now to think about that it's a really modest point, and before we get too far ahead of ourselves, let us get some more traction on it.
Got it. Thanks, Lindon. Steve, you mentioned the expected modest increase in CCS, and it seems like we're at a pretty important inflection here. A somewhat similar question. As you look out over the next two to four quarters, how do you see the CCS business evolving? What are the puts and takes in that business now that it seems like we're starting to move off the bottom?
Well, Craig, obviously we think the potential is strong. We need some fab activity to drive it. We're shipping tools for 7 nanometer. We started to ship some tools for 5 nanometer. I think it's that expansion that'll drive from a foundry side. We're really pleased with the memory acceptance. The question will be, does a memory factory take 3 tools or 6 tools? That'll help to drive volume for sure. I think the thing that pleases us most is as tier 2 foundries come online, as the memory factories begin to adopt it, we think there'll at least be more stability in the business, and that we'll have participation from basically all makers of ICs as opposed to just tier 1 foundry when we initially got into the business 4 years ago.
We're getting close again to $100 million run rate, which is kind of how we guided the business. For us, when we look out into 2019 and 2020, the opportunity probably grows from $110, $120 toward $150 or $200 million. We're really bullish on it, and that's as yet without the impact of EUV, which has the potential to be an accelerator for us, not something that we model into the business too much as yet, as we have tools wherever customers have EUV systems, unless and until that market expands, that'll be a slow grower for us.
Got it. Lastly, you mentioned the difference in performance for your vacuum robotics tier 1 and tier 2 customers. Is that normal when we see the kind of spending dynamics that we're seeing now, or is this something that's a newer development? How would you characterize what you're seeing relative to similar such periods in the past?
I think the nature of the tools business is unbelievably competitive. There are not just the tier 1 OEM portfolios, which are getting to be quite similar and really competitive, but the tier 2 makers really enter into the mix. We think it's more competitive. We think it's more active than at any time that we can remember. Craig, we also think that there might be one more dynamic that's in play here. You'll hear a lot of the equipment makers talk about the adding value to the installed base. The tools that at one time might have become obsolete continue to run, and they're going to be repurposed and reused, and used in another productive fashion.
We believe that even some of the value that we'll bring to installed base of some of these tier 1 OEMs might use a new vacuum robot in an existing tool. We see opportunities everywhere, new tool configurations, existing configurations where the robot could be replaced out. In other words, to enhance the performance of a tool that might have been on the market for 5 or 10 years. The performance of that tool can be improved by putting in one of our next-generation robots. We also have an eye toward the installed base and where we might be able to add value in the coming years by a form, fit, function replacement of a higher-performing robot. We're busy everywhere.
The design activity is at a speed that we've never seen before, the team seems to be absorbing it pretty well, and we're really bullish about what the future looks like in vacuum robots.
Great. Thank you. Lastly, Lindon, would it be fair to say, as we look at the outlook, that given the volume dynamics in the semi business, that it would be fair to think that gross margin would decrease in the quarter and potentially dip down into the high 30s, and there may be some operating expense flexibility, but very little, given that, I think in earlier comments, the company mentioned it was persisting with all its investment programs. Thanks, guys.
I appreciate that question. I would tell you that our expectation is stability in the semi margins this quarter. While we're down a little bit, that'll put a little pressure on us. We do have Tec-Sem improvements to be made in the quarter, and overall, we'll expect some stability in margins. Improvement on the life science side will help bolster the total. With that said, your comment's exactly right on operating expense. We're keeping the team on the field. We see this as key to our franchise in terms of responsiveness to the customers in the short term. We're going to maintain that position and our investment. Appreciate that question. Thanks.
Thanks, Lindon. Thanks, Steve.
Our next question comes from the line of John Pitzer with Credit Suisse. Your line is open.
Yeah. Good afternoon, guys. Thanks for letting me ask the question. Steve, my first question on the semi business, just going back to the contamination and control, you said you expected that business to grow sequentially into the September quarter. Is that with and without or without Tec-Sem, or is that mainly inorganic growth? Just relative to your comments around EUV, I'd be curious to get a sense of how you think this market could play out. If you think about EUV being adopted for maybe two to three layers at seven nanometer and five to 10 at sort of five nanometers, how would that translate into your potential market opportunity?
Sure, John. Thanks for asking the questions. I think both are great. Let me start with the CCS. We delivered just above $4 million on Tec-Sem, and we're kind of forecasting a little bit more than $5 million. In the core business and in the Tec-Sem portion, we see modest growth. We want to be cautious here that this isn't off to the races yet, but we anticipate growth from both portions of that, it'll be organic and obviously inorganic growth. Modest for the September quarter, but growth nonetheless. That's a positive for us. On the EUV side, we have products now for the EUV pod cleaning, and we've established that capability everywhere someone has EUV installed, and now we have reticle management.
We believe that as the EUV systems go into place, this combination of the pod storage, the pod cleaning, and ultimately maybe even a different type of EUV reticle management, we think that provides opportunities for us. Whether it's done at atmospheric pressure or done under vacuum has yet to be determined. We do see opportunities in EUV. As I mentioned to you, we're not forecasting strong growth yet, but we are hearing positive signals about the adoption of EUV. We don't know in the ecosystem how many reticle management tools and how many pod cleaners will be associated with, will it be with a single EUV exposure tool, or will those tools serve multiple EUV systems? We're just not sure yet.
That's helpful. Lindon, just on the gross margin profile for Life Sciences, appreciate all the information. I think there were three major levers you kind of talked about: redesign, supply chain efficiency, and mix. As you think about sort of the intermediate-term goal of going from 38%-40%, and then sort of 40%-44%, is each one of those sort of an equal factor in the gross margin expansion, or is one more significant than the other? As a follow-on there, Steve, as you think about the landscape for M&A in that part of your business, would any M&A sort of still be consistent with kind of those gross margin targets?
John, thanks for the question. I think this one too is a good one. First and foremost, the immediate return to 40% in Life Sciences will come from the systems improvement, and the biggest element of that is the redesign of some module production that has taken longer to get both the design as well as the implementation in an efficient manufacturing process. This is connected to modules that we had outsourced in early 2017 and then middle and late -- well, I should say by the end of 2017 and early 2018, we were bringing them back in-house. It just wasn't effective in an outsourced equation. We had some redundant costs, and now it's our re-implementation that has snagged us a bit. We believe that we would make more progress this last quarter.
That's not to dismiss that we have some improvement, as I mentioned, on just schedule and project management as well as freight optimization in those projects. That'll be the quick help, we believe, going into the fourth quarter and into this next year. The mix will be a continuous traction that we'll watch. As I said, just one year difference, almost one year difference, we're seeing about one point help in the flavor of mix, and that's attributed to the consistency and the traction that the storage services platform has brought.
John, this is Steve. On the topic of gross margin for the types of targets that we're looking at, I would anticipate that you'd see gross margin improvement from any of those opportunities.
Perfect. Thanks, guys.
Thanks, John.
Thanks, John.
gentlemen, there are no further questions. Please continue with your presentation or closing remarks. Thanks.
All right, David. Thank you very much, and we thank all of our investors and our analysts for listening in and the interest that you take, and we look always to service you with the information we bring to the call. We look forward to talking with you again next quarter.