CMC Materials, Inc. (CCMP) 2002 Q4 法說會逐字稿

Good morning. My name is Elizabeth, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Cabot Microelectronics 2002 fourth fiscal quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key.

Thank you. I would now like to turn the call over to Mr. Ellen, Chief Financial Officer. You may begin your conference.

Elizabeth, thank you. Good morning, everyone. This is Marty Ellen, Chief Financial Officer for Cabot Microelectronics. With me today is Matthew Neville, our Chairman and CEO. Matthew and I are pleased to host our fiscal 2002 fourth quarter earnings conference call. We will need about 20 minutes or so for our comments. After that, we will open up to questions for about 30 minutes.

This morning we reported our fiscal 2002 fourth quarter and year-end results. A copy of our press release can be obtained through our Web site or by calling our Investor Relations office at area code 630-499-2600.

Today's conference call is being recorded. Access will be available for two weeks via telephone playback. The playback number is 1-800-642-1687, and you will need access code 5738517. Webcasting playback is also available through our Web site at cabotcmp.com.

Before we begin, I would like to remind all of you that our conversations today may include statements that constitute forward-looking statements. Such statements involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from these forward-looking statements. These risk factors are discussed in our SEC filings, including our reports filed on Form 10-K for the fiscal year ended September 30, 2001 and on Form 10-Q for the third fiscal quarter of 2002, which ended June 30th 2002. I'd like to again remind you that we assume no obligation to update any of this forward-looking information.

With that said, I will review our financial performance, and then Matthew will provide a progress report on our accomplishments and the business. Afterwards, we will take your questions.

We are pleased with our results for the quarter and for the year. Total revenue for the fourth fiscal quarter ended September 30th was $65.3 million, up a strong 27 percent from the fourth quarter a year ago. On a sequential basis, revenue was down 4.6 percent from the third quarter, with volumes declining by about 8 percent sequentially while average selling prices were up about 3.5 percent. One third of the sequential average selling price improvement was due to the strengthening of the Japanese yen while two thirds was due to product mix.

Revenue from sales of our copper products was up sequentially 12.2 percent. On a year over year basis for the fourth quarter, copper product revenue was up 78.1 percent. For this year's fourth quarter, copper product revenue represented 23.8 percent of our total mix and for the full 2002 fiscal year represented 20.2 percent of our total revenue mix. For the entire fiscal 2002 year, copper product revenue increased 115 percent when compared to fiscal 2001.

Tungsten and dielectric product revenues on a combined basis were down 8.9 percent sequentially, and our data storage product revenues were down 7.6 percent sequentially. Matthew will comment on these trends in a few moments. Gross margins were 51.1 percent for the fourth quarter, compared to 53 percent for the third quarter and 50.8 percent in the fourth quarter a year ago.

A few noteworthy items affected gross margins this quarter. In connection with the expiration of the repi (ph) royalty obligation, we did make a final payment in the fourth quarter of $586,000, which now completely terminates our obligation under this contract. Additionally, we recorded $1.1 million of sequentially higher cost of goods sold expense this quarter for a number of inventory related items, including the write off of some experimental products, products made for specific customer qualification activities, and other products which we determined did not meet quality requirements. So in total, we recorded about $1.7 million of additional cost of goods sold which reduced gross margin this quarter by 260 basis points.

Operating expenses consisting of research and development, selling and marketing, and general and administrative were $16.6 million this quarter, down $400,000 from the $17 million in the third quarter, but up $3.7 million from the year ago fourth quarter. The year over year increase for the quarter is almost entirely due to our planned increases in R&D investments during fiscal 2002, particularly related to the mid year opening of our new R&D facility in class one clean room. These investments have given us enhanced capability which is already paying dividends in some of our newer product development initiatives as well as in our on going customer support activities.

Our full fiscal year 2002 effective income tax rate came in at 33 percent, resulting in a fourth quarter effective income tax rate of 32 percent. For all of last year, our effective income tax rate was 34 percent. Net income for the fourth quarter was $11.5 million or 47 cents per diluted share. Compared to the year ago fourth quarter net income and diluted earnings per share were both up 24 percent. In the third quarter of this year, net income was $13.3 million or 54 cents per diluted share as a result of the near record level of revenue we achieved last quarter.

For all of fiscal year 2002, revenues were $235.2 million, up 3.5 percent from fiscal 2001. And on a full year comparison basis, average selling prices were up 1.2 percent with volume being up 2.3 percent. Mostly owing to the higher level of R&D spending, which was planned for this year, net income for the year of $40.7 million fell just short of last year's $41.9 million and diluted EPS for fiscal 2002 came in at $1.66 compared to $1.72 a year ago, but remember that we settled certain patent litigation earlier this year. Absent the cost of this settlement, earnings would have been $41.4 million and diluted EPS would have been $1.68, pretty much on par with last year.

Actual shares outstanding at the end of the quarter were 24.3 million, while weighted average diluted shares outstanding during the quarter were 24.5 million. Capital expenditures in the fourth quarter were $3.3 million bringing full year capital spending to $35.2 million. Depreciation and amortization in the fourth quarter was $3.8 million and for the full year it was $12 million. At September 30th 2002, cash and equivalents stood at about $70 million while total debt including capital leases was $13.9 million.

Those conclude my financial remarks. I'd like to now turn the call over to Matthew.

Thank you, Marty. Given the difficult industry and operating conditions our customers have faced over this past year, we are pleased with our performance and accomplishments in the quarter and for the year. Our commitment to staying focused on our mission critical objective has enabled this performance and has solidly positioned us going into fiscal 2003. These mission critical objectives have been primarily geared towards advancing our product technologies along with our customer's technology requirements and supporting these initiatives with the necessary operating and capital investments while otherwise, stringently managing our other costs.

Full year 2002 copper revenue growth was 115 percent and represents 20 percent of fiscal 2002 revenue compared to 10 percent of fiscal 2001 revenue. This level of copper activity was pretty much in line with our expectations going into fiscal 2002 with the exception of a few bumps in the road along the way, as some customers experienced more challenges than others in introducing and ramping this complex new technology. Commercial copper device production is occurring at the 0.15 and 0.13 micron feature sizes.

Our early dedication in developing the leading edge Copper CMP slurries enabled us to earn the leading market position in copper that we believe we have today. Next-generation copper IC devices are expected to be at the 0.1-micron or 90-nanometer node with commercial production of these devices by some of our customers expected to begin in late 2003 or early 2004. Notwithstanding the difficult economic and industry environment, this copper technology advancement appears to be continuing.

Sampling and qualification activities are well under way, and we are getting good feedback on our technology. We continue to expect some of these customers to make final supplier decisions for these next-generation processes by the end of the next quarter. We are optimistic about our position in these qualifications.

As we have said before, we've dedicated substantial resources to copper in both R&D and manufacturing to support our customers' requirements around this very challenging technology. Many of you have visited us and seen some of these investments. We continue to dedicate R&D resources to each of the 130, 90 and 65 nanometer copper technology nodes. Given our progress to date with these technologies, we remain positive about our ability to continue to meet our customers' very challenging needs in Copper CMP. Tungsten and dielectric combined product revenues were down sequentially from the third quarter by almost 9 percent.

As we experienced the impact of wafer starts slowdown by some of our customers this quarter from the very high levels last quarter. You should recall that last quarter, these products on a combined basis grew sequentially by 39 percent. Unfortunately, it does not appear that the end market demand could support this continued level of activity. So we experienced some softening this quarter. However, if you look at the fourth quarter revenue run rate for both tungsten and oxide products, it still represents a 22.6 percent increase over the average of our first two fiscal quarters of this year, a healthy improvement.

We continue to follow our business model of continuous product innovation for our tungsten and oxide product lines to meet the emerging needs of our customers. In tungsten, we are working on next generation products. In oxide, we've been developing several new products, which are designed to yield even better performance than our existing products in both ILD and direct SDI applications. All of these investments around tungsten and oxide products are important, as we expect continued growth in these applications. For example, while some tungsten layers are expected to be replaced by copper, tungsten is still expected to be used in certain front-end layers near the transistors.

In addition, memory devices are presently not expected to move to copper, and memory represents about 25 percent of the IC device market. The industry continues to explore new tungsten applications, such as metal gates; and for these reasons, we continue to invest in new product development.

I'm pleased to report that we've scored a victory in tungsten this quarter by securing new business. We've been working for some time with a number of customers, who formulate their own tungsten slurries, referred to as homebrew or captive market customers. We've recently secured some tungsten business with one of them while continuing to work towards the same goal with the others. In fiscal 2003, we expect to see this incremental revenue from the one account already secured. As IC device technology continues to advance, making homebrew technologies less extendable, we would not be surprised to see other homebrew customers move in a similar direction to outsource their slurry needs.

Let me now move to our data storage business. Even though data storage product revenues were down 7.6 percent sequentially this quarter, we remain encouraged. Data storage revenue grew 46 percent for the year and represents 7.5 percent of full fiscal year 2002 revenues. These results demonstrate the value our technology has brought to this industry, an industry, which has experienced a very difficult operating environment, as the number of platters for disc drive has decreased due to the dramatic advancements made in aerial densities, as well as by the soft PC market.

Despite these difficult conditions, the hard disc drive industry has continued to rapidly advance disc drive technology. Over the last two years, the industry has made four major advancements in data storage technology. The industry is to create storage capacity from 20 to 80 gigabyte disc drives, with the 80-gigabyte technology only recently transferred into commercial productions at some customers; and the industry is now moving to 120-gigabyte drive. We have two customers who are using our new technologies for their 80-gigabyte process, and we continue to work very hard to earn this business at a third customer. In addition, certain customers have begun sampling our newest product for their 120-gigabyte technology; and we're getting encouraging feedback. The 120-gigabyte technology is expected to move into commercial production in 2003. We feel good about our position in the hard disc drive CMP market.

We've begun to make progress with our pad program. Our strategy is multifaceted, and we've reached a significant milestone this quarter in one facet. This quarter, we entered into a distribution agreement with Freudenberg Nonwovens Limited, an existing supplier of pad to the industry. Freudenberg's current product works well on existing applications and, therefore, allow an immediate market penetration opportunity. In fact, we have already several large customers evaluating pad, and we expect to see revenue from these programs in fiscal 2003. Freudenberg, however, is only one part of our pad strategy, a strategy, which also involves bringing new pad technology to the market. We remain very active on the other facets of our strategy and in effort to roll out a comprehensive pad business for our customers. When we believe it is appropriate to discuss these other facets of our pad activity. We'll share those details with you.

Before concluding my formal remarks, I'd like to assess where we are and where we may be heading. 2002 has been another tough year for the semiconductor industry. IC device inventories, which reached a peak in early 2001, were still burning off as we moved into 2002. By midyear, IC inventories were reduced to more normal levels, which did lead to some improvement in our customers and our business. Our 29 percent improvement in combined tungsten and oxide product revenues in the last six months as compared to the first six months of 2002, we believe it's primarily due to the resulting higher production by our customers as a result of this improvement in IC inventories.

With neither our customers nor we experience was any improvement in demand driven by the end market as the lack of any pick up in corporate IC spending laid heavily on the PC and computer related markets. The softness in the PC and telecommunications market offset the strength in the automotive, consumer related product, and cell phone end markets for IC devices. And now it appears that the seasonal back to school period did not provide the kind of lift in the end market that had been hoped for. Never has forecasting visibility for our customers been so low and caution been so high. For example, it is not clear to us whether recent reductions in wafer starts by the foundries are the result of end market weakness or the caution being exercised by their customers who do not want to be caught with excess inventory. For our business, we experience strong -- surprisingly strong sales activity levels in April and May with some softness in June. In July and August, sales activity pushed up again, but September softness in the first three weeks of October appeared to be tracking with September. We'll have to wait and see how these factors ultimately pay out for our business next quarter.

We historically have been able to grow at rates higher than the overall semiconductor industry because the industry is always advanced its technology, as it has done again through this downturn. These technology advances provide further opportunities for CMP penetration. Copper technology is a good example, and this technology advancement provided strong growth for us in fiscal 2002. We are not able to predict when the economic activity in the important end markets for IT devices will improve. However, we believe our position in the marketplace is strong. We have maintained our dedicated focus to meeting the technology requirements of our customer and have supported those initiatives with the appropriate investments. For these reasons, we enter fiscal 2003 with confidence.

That concludes my prepared remarks. At this point, I'd like to open it up to questions.

At this time, I would like to remind everyone, in order to ask a question please press star, then the number 1 on your telephone keypad.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from Jay Harris.

Good morning, Matthew.

Good morning, Jay. How are you?

Good. Excellent performance in a difficult environment. I have a number of unrelated questions. One, as the feature size comes down and there is a slowdown in the installation of 300 millimeter wafer fabs, what's the tradeoff there, net positive?

The tradeoff we would look at as being net positive. And what you need to recognize is, you know, 300 millimeter is not a technology enablement; it's a cost saving opportunity for our customers. And so what they will do is they'll -- and we're seeing that happen, take their manufacturing base of 0.25 micron, 0.18 micron and move that to leading edge. And that's kind of why you're seeing the pullback. There is some excess capacity out there. But they will continue to advance on the leading edge technology.

Can you put the trend to smaller feature size in context with the copper adoption program in terms of relative importance?

The feature shrink -- if you look at the technology, the two key technologies that are happening is -- and most of it is driven by feature shrinks, really is the main driver, and in the logic area that incorporates the use of copper wiring. About half the wafer starts, we will see -- at least half the wafer starts, we'll be using copper and that will be the indication as you go in to 90 millimeter.

However, memory won't use copper but will continue to shrink and therefore more wiring layers and requirements for more advanced technologies. So you will see it on two fronts as the technology advances both in the memory sector and in the logic sector.

Are these equally important drivers as you go into 2004?

They're ...

I mean '03.

They're both equally important drivers in both segments of the market. What you see is there is much more visibility around copper just because you can isolate it and see it. You're seeing a lot -- beginning to see memory moving into 0.13 now and you hear press releases about that. But they are both important drivers. It's just copper is more visible. Copper is also more complicated and also it's leading to the introduction of new dielectric materials as you go to 90 nanometer.

As you exited 2002, what percentage of your revenues came for slurries that were used on ICs?

I'm going to look at, Marty, but somewhere around 90 percent.

93 percent.

And what do you think that ratio will be for '03?

What we expect is that we will continue to see growth in the overall IC due to the leading edge. A lot of the magnitude of the growth will depend on what happens in the overall economy, and we expect that growth in the data storage area will mostly be driven by penetration, where we do expect to capture new business. We are making inroads in Japan. We are also making inroads as we go to 120 gigabyte disk drives.

We are broadening our penetration not only to final polish, but to first step polish with a combined set of products for that, which gives much more enhanced performance overall than just focusing on the second steps. So, we do expect some growth in the -- and then we do expect to see some revenue gains from Pad. Overall, at this point, we are not in a position to tell you exact breakdown.

And then finally, if business continues on the same level that you see here in October, what would your guidance be for the December quarter?

Jay, this is Marty, as you know, we don't give revenue guidance, because it's just too unpredictable and too uncertain for us. I think, as Matthew said in his remarks, we've given the trend for the last six months, which has been sort of an interesting trend in terms of the first two months of the quarter being quite strong and the last two quarters with softening in the last month of the quarter and in October, first three weeks looking a lot like September, which is truthfully the way July looked at this time last quarter.

We compared it to June and then, surprisingly, we saw some strengthening after that which then softened in September. So, I would tell you that, you know, the September number -- revenue number, I would still characterize. It is higher than the monthly run rate we experienced back in the first half of the year when we were pretty much running at $50, $51 million in revenue a quarter.

Thank you.

Your next question comes from Jeff Cianci.

Hi, guys. Maybe Marty missed out one last accredited comment on margin and mix. I guess he was impressed with the price index going up. I guess it implies that, you know, as you move to the top of some of those things, they're higher priced. I guess I'm wondering about the margin and if the margin was distorted here by these onetime negative items. Does time normalize that out? We looked at '03, perhaps when the operating line with expenses now at this level, shouldn't we see some margin improvement each quarter, sequentially? How does that play out in the mix?

Okay, Jeff, just let me walk through the margin for this quarter and what we might think about going forward. First of all, as said in the press release and in my prepared remarks, we did take a couple of hits to the margin this quarter in the form of what ended up being a final payment directly to finally terminate that agreement and some sequentially higher inventory adjustments related to experimental qualification and other materials, which is a cost we have, generally, every quarter but as you'd expect as we move closer and closer in these final qualification activities, our activity level picked up substantially this quarter.

So, we incurred some higher spending. If you factor those out, you will end up with about 53.7 percent of margins this quarter, and in fact, if you put the repi (ph) payment back into last quarter where with hindsight it may have belonged and you adjust, Jeff, for the difference in volume between the two quarters, revenue meaning last quarter was higher for this quarter, this quarter would have been up on a trended basis by 220 basis points at that 53.7.

Now, you are correct. We did have some mix improvement, and all other things being equal, that should have increased the margin a little further. However, I will also tell you that we continue to invest, as Matthew said in his remarks, in quality in other areas in manufacturing which speaks to the requirements to be successful in this business as this technology advances. And, you know, we are in this for the very long term, and we think we are making the right investments in manufacturing just as we have done in R&D.

So where we are -- so some of that is offsetting, but you might otherwise expect to be some of the pick up in the margin due to a favorable mix. Our model is and has been and will be margins in excess of 50 percent. Yes, we eliminated the royalty, and I'm telling you we are spending some of that back, we think, in the right areas. I think, you know, we are comfortable in this sort of 53 range at the current level of sales. And of course, as sales go up and down, we get a little up lift or down lift due to volume. But I think in this sort of low-ish 50 range -- 53ish range at this level is a reasonable expectation.

At which level? At the quarterly level or the ...

No, what I'm saying is that -- what I'll call -- I hate to use the pro forma word -- at the -- if you adjust out repi and the inventory expenses and you do the math, and I think, I quoted the 260 basis points in my remarks and add that back to the 50 ...

Right.

... your 53.7. And what I'm suggesting is that we think that's a more reasonable expectation at this level of sales.

Okay. And as the mix improves during the year as '03 progresses, is there a little bit of upside there? I mean, you know, I know you don't want to -- well, actually, you don't care Marty, you won't be here so ...

Let me just come back to that because I think this question always comes up where our margin is going, and I think you know we've always been very consistent, and I think our performance has been very consistent. Our margins have always stayed between 50 and 54. It's the way our, kind of, business model is managed, and so you need to be thinking in that prospect, and there are a couple of reasons for that. I think we need to continue to make investments. As the technology gets more complicated, the manufacturing gets more complicated.

And at the same time, there's always a delicate balance as we bring out new technology. You know, we don't want to be (inaudible) our customers. We have long term relationships with our customers, and we want to manage those relationships with a good balance. And so our business model is probably going to drive us to stay in the 50 to 54. And I think if you look over the last two years since we've been a public company, we've been pretty consistent.

You mean, now let me take it one step further to the operating margin line. I mean, if you clean up this quarter, it was 28.3, if you will, and you know, going forward, your expenses in '03 -- if I take this run rate, probably could grow, you know, full year basis less than sales by maybe some leverage in the operating margin. Would you hope to see massive explosion in the operating margin in '03?

Yes, Jeff, I'll answer Jeff even though I am leaving soon, but as you know, let me -- just take the pieces. We talked about the margin, and I think we sort of set around a number at the current level of business that you can toggle up or down with revenue expectations.

I think on the operating expenses, we're a little light. We had good cost performance this quarter at $16.6 million in total operating. I think we did -- have an expectation for next quarter of low 17 -- low 17s and pretty much our view is -- but for very nominal increases beyond that, that's probably the run rate. I think it's fair to say that for the most part the foundation of the house, the infrastructure, et cetera has been built. So the real question is what kind of push do we get on the all important revenue line, and that's where things get very cloudy and difficult for us to predict.

When you can create models, as we have, and looked at that can have a very strong operating margin performance given, sort of, this economic framework of operating expenses being where they are and the gross margins being where they are.

Okay. I'll leave it there. Thanks guys.

Your next question comes from Susan Crossley.

Hi Marty. Hi Matthew.

Good morning, Susan.

Hi, Susan.

Let's see -- I've a got a few questions but first and foremost perhaps you could walk us through how the accounting will work on your distribution agreement with (inaudible)? Well, for example, you know, would you be recognizing the full dollar amount and then show a lower than company average gross margin or -- you know, or just your add-on or how does that work?

Susan, it's Marty.

Yes.

It's a classic distribution agreement. We will acquire products from them at agreed upon pricing. We will sell it to our customers at a margin. It is a distribution agreement, and so the expectation would be for a lower gross margin than in a product where we bring all the value from our own technology. However, remember that we have a pretty expansive sales and distribution system in channel to market, which we're using to leverage this program and R&D resources as well that we've had working in this area. So, while we might have a lesser gross margin, we may - in fact, still have a pretty healthy drop to the operating line.

Okay, okay. That makes sense. What -- if you've already told us, forgive me. But what were Freudenberg's trailings from revenues in the past?

We're not disclosing that.

Okay.

Let me just clarify so you understand. They have a handful of customers. They have been working with one of the top technology leaders for several years in the development of this technology and in the development of their manufacturing. And so, they come very well positioned from a proven technology and a proven manufacturing. I think it's a great marriage between the two.

We complement each other extremely well, and that we bring immense strength from our technical knowledge about the application, about our technical support capability and our channel to market. And so, the one thing they have not done is broadly approached the market. And this allows us to leverage both companies' strengths and move quickly into entering the market.

Okay. Regarding the inventory write-off you took during this quarter. Is that -- and you mentioned it was related to experimental products and developmental products, but is that related to Pads or Slurries or both?

Slurries.

Slurries, okay. And then finally, what's the progress on the CFO hunt?

Let me just update you. During the transition period, Dan Lavvy (ph) will be acting CFO. He's been with the company for 9 years in this business along with me. Before Marty's arrival, he was acting CFO. He's built the financial organization, and Marty has added a lot to the depth and breadth in his tenure here. So, we feel very confident about the position we're in today. I think our financial systems with the introduction of a new business system are better than ever and we've got a solid team.

So we're very comfortable and confident in the position we're in. We've started a search last month. We probably have over 100 and some odd resumes that we are working through. We are working with an outside firm, who is leading through that process. They were in the same firm. We've worked with them before. They recruited Marty, and we've been very fortunate with that. They also recruited our new vice president of marketing and sales that started last year.

So we are moving aggressively to bring in a new CFO. But we're very confident about our position. We're going to make sure that we get a good fit, and someone that really meets the business needs.

Okay. And actually you know, I lied, I'm going to ask another question and that is that perhaps it's not going to be a large enough percentage of revenue that you must breakout in the new pad business, but will you be doing that or telling us what percentage of revenues there are -- just for the picture on margins?

We'll probably do, as it gets substantive, just as we did with data storage. We broke it out so that the investment community could understand. We'll share in some form, an indication of how we're doing and the impact that it has on our business, the details of which we haven't decided yet.

Okay. Thank you.

You're welcome.

Your next question comes from John Roberts.

Hi, John.

Can you hear me?

Yes, John. Good morning.

And good luck, Martin, in your next assignment.

Thank you, John.

Matthew, in the pads area, you know, Freudenberg developed something new and you're working on new pads. How do you manage that conflict?

Part of our arrangement with them is we'll be working closely with them on developing the technology platforms off their core technology. So we consider it part of process. Not only are we going to be distributing their existing technologies, but we will be working closely with them to develop and leverage their competency around polymers and manufacturing to develop new technologies and new pad technologies for the market.

At the same time, we will be developing our own technologies internally. And what I think both parties agree is what we want is the best technology out in the marketplace, and we're going to work collectively and openly to do that.

There are formal joint development agreements or you're just counting on each other being good people about this?

I don't know whether there's a formal agreement, but there's a clear understanding that we will proceed and be working with them.

Okay. And I may have missed this but you talked about the data storage business being down and why you had a lot of confidence, you know, coming back but did you talk about specifically why it was down? Was it just the expiration of a particular drive model or ...

A couple of reasons why. If you look at aerial densities, they've gone up four fold -- which is aerial densities or how much information you can pack per square inch. And they've gone from 20 gigabyte to 80 gigabyte, and they're moving to 120.

And as a result, the number of platters that go into disk drives are dropping. So there's been some shrinkage because of that effect. The main application they go into is PCs, which has not been growing very strongly and so those are the two reasons for the -- just business it's tough. It's a tough market to be in. I think the reason that we're optimistic and encouraged is that as we go into the 120 gigabyte technology, the requirements are becoming much more stringent, and there's a real need for another, what we would call, step change in performance. And what our technology approach has been is really to combine both the first step and second step polish technology as a consumable set.

And we've made some significant breakthroughs in that technology set. And what it will do for us is broaden the market opportunity, or the market penetration for us in the market opportunities we bring both the first and second step technology to the market. In initial results of several customers, the feedback is very encouraging. So we're excited about the future, not because it's a growth story, per say, but it's a market penetration and broadening of market opportunity.

So does that mean in drives under 80 gigabytes or 80 gigabytes and under that you are pen -- further penetration into that existing segment is going to be somewhat limited?

For two reasons, I guess -- the short answer is yes, and the reason is that they cannibalize their products so quickly. They are on a much faster pace than the IC device industry and so there's very little 20 gigabyte even though it was at the peak two years ago. There's little to no 20 gigabyte discs being made today, and so it cannibalizes at that front. And you look as buy your PCs every time you go out, every month you'll notice, the hard disk drive has more capacity, and they move to the new technology immediately.

And I -- but that would mean that within, you know, a couple of year window you would expect your technology to address the majority of the market.

Yes.

Okay. All right. Thank you.

Thank you, John.

Your next question comes from Ali Irani.

Good morning, gentlemen. Great results and just looking at them, it seems like the stars are aligned for Cabot. Whether the line which you're going down or the metallization is increasing, or the materials are changing your customers are going to need more of your next generation products, and I'm just looking at your fourth quarter revenues that were down 4 percent and your mix had improved and your margins improved, and I am wondering whether in the next quarter or two, even with the volume coming down the mix effects can continue to favorably cushion your results?

Ali, let me take a piece of that. I'll then let Matthew reflect on what he would like to add, without of course talking about what our revenue expectations are because we -- it's very difficult for us to do. You know, I think it's interesting if you and we presented this at conferences -- if you look at some of the trend in margins, which have been trending up over the last three or four years it's -- you know, a big part of that is not as much as revenue growth as it is this issue of mix and waiting in increasing amount of the product portfolio and the revenue to a more leading edge and advance technology products.

You know, we said Copper was, you know, almost 24 percent in the quarter; and of course, Dielectrics and Oxide, you know, make up, you know, some 70 percent. And as you know, they -- we've been almost split so if you take Dielectrics for example, Oxide, which is the, sort of, at the lower end of our margin spectrum and that's now in the mid 30s.

And if you dial back two years, that was in the low to mid 40s. So you know, that's a good tradeoff for us over time in terms of profitability. So I think the correct expectation is as the technology is advanced. As the value proposition becomes greater, you'd expect to have better margin performance.

Martin, you also said that the low K Oxides (ph) and the slurries that you're qualifying for that, what impact does that have to your Oxide margins? Are we seeing the margins on that next-generation product be closer to copper margins or somewhere between the copper and the traditional oxides?

As we've always said, as we bring new technology to the market, usually, we're doing that for two reasons. There's a real need for improved technology, which means there is value creation. And so that does provide opportunities for improved pricing and improved margins. At this point -- so there will be an improvement. We're not going to comment on how big of an improvement that is.

Great. Thank you very much.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad.

You have a follow-up question from Jay Harris.

Matthew, in view of (inaudible) acquiring of a pad company and your arrangements, what is this structure of the pad industry as it evolves? Who were the factors, and what are their market shares?

You know -- as you well know, what we see -- just let me start at a high level, and then I'll come down into the details -- what we're seeing, you know, our -- you know, historically, it's been one technology being used in multiple applications. And I think as the technology is getting more and more complicated, we're seeing more segmentation -- or what I would call more specialization -- occurring by applications. And that is creating a real pull for new technologies across broader multiple applications. And so what you're going to see is the opportunity and need for new technologies to come in, and that is one of the key drivers that you're going to see in the marketplace happening around pad.

As historically you've known, Rodel has been the large market provider of pad technology, the bulk of their business is on one technology platform. And so there is a real good opportunity there. I think it does require, you know, substitutive investments, which requires a lot of technical support. I think we bring something that's quite unique and that allows us to optimize both the pad technology and the slurry technology -- in one area, in some work that we're doing with our new pad with Freudenberg, as we're seeing dramatic synergism between our offsite slurry in front-end application.

So we're going to see more and more opportunities for synergism between the two, and that's the second thing besides the specialization around application being able to leverage the two technology platforms they are going to be trends that you're going to see.

Who's in the market place beyond Rodel and Freudenberg?

Yes. We're not going to get into a lot of detail on this. But, you know, Rodel has the largest share. Probably, the next largest that you hear about is Thomas West, and then Freudenberg and then the small, small numbers.

Thank you.

Ladies and gentlemen, we have reached the end of the allotted time for question and answer. Dr. Neville, are there any closing remarks?

Thank you, Elizabeth. I'd like to thank all of you for your time and interest in our company and look forward to speaking with you next quarter.

Thank you for participating in today's Cabot Microelectronics conference call. This call will be available for replay beginning at 1:30 p.m. Eastern Standard Time today through 11:59 p.m. Eastern Standard Time on November 8th, 2002 at midnight. The conference ID number for the replay is 5738517. Again, the conference ID number for the replay is 5738517. The number to dial for the replay is 1800-642-1687 or 706-645-9291. Thank you. You may now disconnect.