CMC Materials, Inc. (CCMP) 2003 Q4 法說會逐字稿

Good morning. My name is Brandy and I will be your conference facilitator. At this time, I would like to welcome everyone to Cabot Microelectronics 2003 fourth-quarter fiscal year 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. (Operator Instructions). I would now like to turn today's call over to Mr. Bill Johnson, Vice President Chief Financial Officer. You may begin sir.

Good morning this is Bill Johnson, Chief Financial Officer of Cabot Microelectronics Corporation. With me today is Matthew Neville, our Chairman and CEO to host this earnings conference call for the fourth quarter of fiscal 2003 which ended on September 30th. Matthew and I will take about 25 minutes for our formal comments, after which we will open up the call to questions.

This morning, we reported results for our fourth quarter and full year fiscal 2003. A copy of our press release is available in the investor relations section of our website at cabotcmp.com, or by calling our investor relations office at 630-499-2600.

Today's conference call is being recorded. An access will be available for two weeks via telephone playback. The playback numbers are 800-642-1687 in the U.S., or 706-645-9291 internationally, and you will need access code 743-6284. The playback will also be available via webcast for the next two weeks and in the investor relations section of our website, along with a script of this morning's formal comments.

I'd like to remind you that our conversations today may include forward-looking statements that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those 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 30th, 2002, and on form 10-Q for the quarter ended June 30, 2003. We assume no obligation to update any of this forward-looking information.

With that said, I'd like to review our financial performance, then Matthew will provide a business review. Afterwards, we will take your questions. I will begin with a review of the income statement, then I will cover selected balance sheet and cash flow items.

Total revenue for the fourth fiscal quarter was $67.9 million, up 5.6 percent from the $64.3 million we reported for the prior quarter. Revenue grew this quarter due to the absence of the revenue impact we reported last quarter of approximately $3.7 million associated with transitioning from selling through a distributor to selling direct to customers in Europe and Southeast Asia. Total revenue was up by 4 percent versus the same quarter last year.

In our IT slurry business, after two consecutive quarters of double-digit revenue growth from the sale of slurry for polishing copper interconnects, revenue from copper products declined by 7.9 percent from the record level of the prior quarter. Matthew will discuss this decrease in detail, but in summary, we attribute the reduction primarily to improvements in yield and efficiency by our customers, particularly as 300 millimeter wafer capacity ramps, as well as there's some quarter-to-quarter inventory drawdowns by a couple of our key customers, rather than to a loss of business.

Revenue from tungsten and oxide slurries taken together was up 10.4 percent. In addition, our data storage slurry business grew by 10.1 percent, recovering from a comparable sequential decline that we reported last quarter. Our average sales price for slurries was unchanged versus the prior quarter. Benefits of higher prices in Europe and Southeast Asia associate with transitioning from a distributor to direct sales offset the impact of selective price reductions and an unfavorable product mix with respective pricing.

Gross profit for the quarter was $34.4 million, up by 4.6 percent versus the prior quarter. This represents 50.7 percent of revenue, which is down slightly from both the 51.2 percent that we reported last quarter and the 51.1 percent for the same quarter last year. Gross profit benefited this quarter from lower manufacturing costs, improved product mix with respect to gross profit and higher utilization of production capacity. However, these benefits were offset by a $2 million charge we recorded this quarter for our remaining minimum purchase obligation under our raw material supply agreement. This supply obligation associated with an older polishing pad technology unrelated to our current pad strategy that we had pursued in the past but has since discontinued. Matthew will discuss this further in his review of the business.

Let me turn now to operating expenses, which are comprised of research and development, selling, marketing and general and administrative costs. Operating expenses this quarter were $20.5 million, which is $2.2 million higher than last quarter and $3.9 million higher than the comparable quarter last year. Major areas of sequential increase were hiring costs, costs associated with the pad technology license and marketing collaboration with Applied materials that we announced last quarter and increased activity in our CMP policy and metrology clean room, which is an important aspect of our product development and customer support efforts. R&D costs for this quarter reflect our strategy of investing to maintain our technology leadership. We increased sales and marketing cost to improve our support and connectivity with our customers.

Our effective income tax rate for the full fiscal year is 32.7 percent. This is down from the 33.5 percent last quarter due to higher tax credits we recognized this quarter on research and development spending. Because of these credits, our effective income tax rate was 30.3 percent this quarter. We expect our tax rate will be 33.2 percent in fiscal 2004. Net income for the quarter was $9.6 million, down only slightly from $9.8 million last quarter, despite the effect of the raw material supply obligation charge, and down 15.7 percent from $11.5 million in the same quarter last year. The weighted average number of shares outstanding on a diluted basis was 25 million this quarter. Diluted earnings per share for the quarter was 39 cents, which includes the adverse impact of the raw material charge of approximately 5 cents. This is down by 1 cent from 40 cents per share how last quarter and down by 8 cents from the year-ago quarter.

For the full fiscal year 2003, revenue was $251.7 million, which is up 7 percent from fiscal 2002. Net income for the full year was $37.7 million, down 7.3 present versus fiscal 2002, and this reduction mainly reflects continued growth in investment and R&D through the industry downturn, as well as investments in our initiatives related to customer support and operations excellence. EPS for the full fiscal year was $1.53, down 7.6 percent versus fiscal 2002.

Now let me briefly cover cash and balance sheet related items. Working capital increased by $5.7 million this quarter, primarily due to an increase in our receivables balance. Receivables increased with the high level of sales this quarter as well as due to the impact of transitioning from a distributor to selling direct. The stronger yen and extended payment terms with a couple customers also increased receivables. Capital spending for the quarter was $8.4 million as we made investments in 300 millimeter polishing capability for our clean room, as well as an improvement in manufacturing and (ph) process capability. Capital spending for the full year totaled $16.5 million. Depreciation and amortization was $4.2 million for the quarter and $15.7 million for the full fiscal year. We ended the quarter with $111.3 million in cash. Total capital lease obligations were $9.2 million and we have no long-term debt outstanding. This concludes my financial review, and I will now turn the call over to Matthew for a business update.

Thank you, Bill. With the close of our fiscal 2003, I would like to begin the business review with a few comments on our performance for the full year. Through what was another challenging year for the semiconductor industry, we are proud of having maintained our strategic focus. Amid the challenging and competitive environment within the C&P arena and despite continued pricing pressure, we grew our business while concentrating on three key areas. First, we increased investment in R&D to maintain our technology leadership. Last year, we completed construction of a world-class R&D facility with a state-of-the-art polishing and metrology clean room; and this year, we built on that platform. We have robust product development efforts underway in each of our existing and emerging application areas. We took advantage of the industry downturn to hire additional highly qualified individuals with unique sets of skills and expertise. As the year ended, we invested in 300 millimeter polishing capability in order to stay abreast of our technology-leading customers and maintained our ability to replicate their C&P opportunities in our clean room.

Second, we invested in improving our manufacturing capabilities under our operations excellence initiatives. As technology has become more complex, our customers have demanded increased performance of our products in terms of product quality and consistency. Our operations excellence initiative is enabling our manufacturing operations to meet the increasing requirements of our customers, thereby improving their manufacturing processes. We think this capability translates into competitive advantage.

Third, we increased our focus this year on building our customer support organization. This year, we transitioned from a distributor to direct sales in Europe and Southeast Asia, thereby more closely aligning with our customers in each of these geographies. In addition, we added seasoned veterans in key support areas in order to be more effective and responsive to customers' needs. We are encouraged by the results of these efforts. For fiscal year 2003, we saw overall revenue growth from a level of $57.3 million in our first quarter to $67.9 million in the fourth quarter. During this same period, revenues from our copper slurries increased from $12.6 million in our first quarter to $15.4 million in the fourth quarter. We were able to grow our copper revenues even as we worked with our customers to make significant improvements in our products and processes that improved our customers' yields and efficiencies. The yield and efficiency improvements we helped our customers capture have a short-term cost to us since these improvement adversely impact our slurry sales in the short-term. However, we believe there is a significant long-term benefit as it strengthens our relationships with our customers by clearly demonstrating our ability to provide real value to them.

Finally, despite pricing pressure, we were able to maintain our average selling price in the fourth quarter to within 1 percent of our average selling price in the first quarter. We believe we are well positioned for the industry recovery.

I would now like to highlight specific progress since our last conference call, beginning with our slurry products for copper. CMP slurries for copper interconnects remain a very challenging and competitive technology. The copper business area is a very high priority for us and we have development teams working on applications at the 130, 90 and 65 nanometer nodes. Working closely with our customers, we have made significant improvements in our products and processes for 130 nanometer technology. Based on recent discussions with our customers, they're seeing significant benefits in yield and process efficiencies as they can continue to ramp. With these yields and efficiency gains and with what we believe were some slurry inventory downturns by a couple of key customers, we experienced a sequential decrease in copper revenues in our fourth fiscal quarter from the second -- from the record level of the prior quarter. Recall that this sequential decrease follows two quarters of particularly strong growth in our copper revenues. As Bill mentioned earlier, this sequential decrease does not appear to be associated with a loss of business. Despite what we believe is a short-term impact to our slurry consumption, we expect to benefit from these product and process improvements as existing customers continue to ramp their 130 nanometer technology and as a second wave of customers commercialize and ramp their 130 nanometer technology.

In addition our improvements have been significant enough in some cases that customers are transferring our 130 nanometer products for use in their manufacturing processes for 90 nanometer devices. Additionally, we have new products developed for 90 nanometer technology that have been adopted by several customers and are in pre-commercial ramp. Proper various (ph) slurry is an area where we have not been as strong in the past. However, we have developed a new various slurry, the selectivity of which is tunable (ph) and which demonstrates good surface finish. We have sampled multiple customers who are encouraged by its tenability and low defectivity.

We are also making progress in development of our 65 nanometer copper technology. Currently, we are engaged with two technology leading customers at this node. Tungsten and oxide revenues taken together increased sequentially this quarter by 10.4 percent. Despite anticipated cannibalization of tungsten slurries with increased adoption of copper wiring, we expect continued growth opportunities in tungsten. This should occur with general market growth, as well as growth in leading-edge technologies, such as memory devices and in the front end at logic devices using copper wiring.

For leading-edge devices, we continue to innovate to maintain our leadership in this business area. We're working with a number of technology-leading customers on both 90 and 65 nanometer applications. We have begun sampling a new product which we believe will offer our customers significant performance improvement in plenary (ph) and defectivity. We have received positive feedback based on initial evaluations.

In oxide, we continue work on improving our existing products to maintain our position in this competitive environment. In addition this quarter, we continued development of a new product that we think will provide an attractive performance and value proposition for our customers. We have begun sampling customers and are encouraged with product progress to date. We plan to commercialize this product later in fiscal 2004. For the last several quarters, we have provided updates on progress in our new product for direct shallow trench isolation applications, or direct STI. Our first commercial customer to whom we are supplying a consumable set of our slurry along with our pad commenced manufacturing ramp this quarter at 90 nanometer. Based on the compelling economic benefits and the performance of our products, this customer has decided to back-integrate these products for use at 130 nanometer. We have just been qualified with a second customer at 90 nanometer and several more customers are developing their product processes with our product. We are in early-stage evaluations with still more customers for both 90 and 65 nanometer devices.

Let me now move to our data storage business. As Bill mentioned earlier, revenues from our data storage business grew by 10.1 percent this quarter. The growth is attributed to successful penetration of new technology at our first customer and some recovery from the seasonal industry decline that we experienced in the last quarter. Data storage polish applications are represented by two polishing steps. Our historical strength has been in the second polishing step where we are able to leverage our IC CMP slurry expertise. We are currently selling slurries for second-step polishing for 40, 60 and 80 gigabit applications at a number of key customers.

We recently introduced what we believe is a dramatically improved technology for the first-step polishing application. Our first customer began qualification of our new product last quarter and has now ramped this product for its 80 gigabit technology platform. During this quarter, we also made significant improvements to this product that we believe will make it extendable to 120 and 160 gigabit technology. Qualification for this improved product is underway at this same customer for their 120 gigabit technology. Our plans are to broadly sample this improved product to the market shortly. We are excited about the potential in this new area. Development efforts also continue on the second-step polish applications for 120 gigabit disk technology and our first customer evaluation is underway.

Next let me update you on our publishing pad business. We continue to make progress with our pad business via our two-pronged strategy. First, we are operating as a value-added reseller of pads produced by a third party. This approach is intended to expedite our entry into the market by satisfying the needs of customers' current applications for improved performance and consistency. Second, we are developing multiple pad technologies with the goal of providing a portfolio of pads that are optimized with our slurries for each of our customers' emerging needs and applications. In the role of value-added reseller, we currently have commercial sales to a number of customers. Working with a third party supplier of the pad material, we have improved the quality, consistency and reproducibility of the pad and have received positive feedback from our existing customers. As a result, a number of these customers are qualifying our pads on their other applications.

Beyond existing customers, we are broadly sampling our pads to the market. We believe our pad demonstrates improved performance in our customers' processes in terms of better consistency and lower defectivity. We have one new customer who is in precommercial ramp and two others that have just completed qualification in one application and have started qualification in a second application. In addition, we have a number of other customers who are currently in qualification. Under the second prong of our pad strategy, we continue to developed a range of pads utilizing our own technologies in order to optimize pad and slurry consumable sets for each application. Initial sampling of pads based on our first internal technology should begin later this year. We are satisfied with our progress in this development area.

During the financial review, Bill mentioned the 2 million charge we took this quarter related to a purchase obligation associated with our pad business which I'd like to explain further. In March of 2000, in conjunction with our pursuit of an initial technology for producing polishing pads, we entered into a raw material supply arrangement with a minimum purchasing obligation. This has been disclosed in our SEC filings as an unconditional purchase obligation. After we discontinued pursuit of this technology for its original application, we continued to explore ways to capture value from the commercial arrangement as we met the minimum purchase obligations. Now having identified preferred technologies to pursue, we have concluded that it is unlikely we can extract sufficient value from the arrangement over its remaining life to offset the underlying obligation. Therefore, we have elected to expense the remaining obligation. Our ongoing pad business is unaffected by this decision.

I would now like to take a few minutes to provide a general date on pricing and competitors within the CMP industry. As we have discussed in the past, the CMP arena experiences pricing pressure. This is based both on IC manufactures' pursuit of lower supply costs during the sustained industry downturn, as well as from other CMP competitors. We believe that customers make decisions on suppliers based on three factors in this order of priority. First and most important, product performance. Second, supply assurance, which entails not only redundancy in manufacturing, but the ability of the supplier to reliably deliver consistent product and provide technical and manufacturing support for the product globally; and third, cost of ownership where product performance has a major impact. We believe that product cost is important, but is third in priority.

IC device manufacturers have seen severe technical challenges in ramping copper technology at 130 nanometer. Solving these problems has required debt in all aspects of CMP technology, as well as close collaboration between CMP suppliers and customers. As I discussed earlier, working with our customers, we have made significant improvements in our products and process to help improve yields and efficiencies at our customers' operation and to facilitate the ramp of 130 nanometer technology. We expect that the challenges of ramping technology at the more advanced nodes will be even more severe. As the leader in CMP technology, we believe we are well positioned to meet the increasing needs of our customers as the technology bar is raised. We have a demonstrated track record of developing slurries for oxide, tungsten and copper applications over a range of progressive technology nodes. Introducing these solutions into our customers' pilot plant operations and scale up supply as production ramps to high-volume manufacturing. We believe the compelling growth drivers for CMP demand creates an attractive outlook for the CMP business which is attracting competitors. However, we believe that no other CMP competitor has a track record we do of meeting the performance demand associated with development of advanced technology, improving existing technology and successfully supplying the stringent requirements of the IC industry. Others' ability to perform at the required level is uncertain. A competitor whose product may look promising at a laboratory scale may have difficulty scaling up to meet the very different demands of IC divides manufacturers day in and day out in high-volume production and providing the necessary technical and manufacturing support.

Now I would like to offer some concluding remarks before we open up the call for questions. As we begin our first quarter of fiscal 2004, we see a number of encouraging signs in the semiconductor industry. Overall, semiconductor sales appear to be in an upward trend with growth at leading-edge technology nodes even more pronounced. PCs appear to be leading this growth with the consumer and wireless segment also growing. Based on public announcements, several technology leading semiconductor manufacturers are participating in this growth. As we look at our orders of our products during the first three weeks of October, we are encouraged by an increase compared to (ph) orders during this same period in each of the preceding several months. Admittedly, the first three weeks of sales out of the quarter represents a very limited window on quarterly results. However, based on these results and what we see in the industry, we are cautiously optimistic. In the last two quarters, we have provided near-term guidance on gross profit margin in the range of 50 percent, plus or minus percent. Given ongoing costs and investments required in manufacturing in pursuit of our operations excellence initiatives and continuing pricing pressures, both of which we have discussed in the past, we are maintaining this guidance on gross profit margin. We believe competitive advantage lies in technology, so we plan to continue to invest in R&D. Toward this end, we are now in the process of the increasing our ability for providing our customers in the Asia-Pacific region with robust local technical support. Our plans are to open clean room facilities within the Asia-Pacific region that would provide customers with more responsive applications and technical support than it is possible by relying on our current infrastructure, who is based primarily in the United States. We expect the Asia-Pacific clean room facility to be operational in 2004. We believe that such investments in R&D, along with investments in operations excellence, will enhance our ability to provide optimized CMP solutions to our customers, as well as slurry and pad consumable sets.

As we close our formal comments, I would like to notify you of an organizational change related to our pursuit of technology leadership. Kathleen Perry (ph), who previously served as our vice president of R&D, has assumed the new role of strategic technology fellow (ph) and has been charged with mapping the CMP technology roadmap for the next several technology nodes. In conjunction with this, we have undertaken a search to identify a new vice president of R&D. In the interim period, the R&D organization is reporting to me -- given the strong technical team we have at C&C (ph), we believe that we're working through the transition period without any adverse impact on our business. I would now like to open the call to questions.

(Operator Instructions). Ali Irani, CIBC World Markets.

Good morning. Matt, I was hoping you could qualify for us a little bit these efficiency gains on copper slurries with customers, and to what extent they are onetime events or short-term events in the third quarter now being offset by the ramp in copper wafers themselves. And I was hoping also that you could talk a little bit about the current state of inventories at your customers. I know they were pretty low already at the end of Q2. It seems that they went down again. Could these first three weeks of the quarter be benefiting from inventory replenishment? Thank you.

Let me answer your first question, the yield improvements efficiencies. And let me just start out with a high level. I think it is important to understand that when our customers went into commercial production, a number of them were down in yields, starting yields around 40 percent. And so there was need for dramatic improvements in process and yield efficiencies. And so over the last year, we have been working intensely with our customers to help them improve their yields and process operation. I'll just give you two examples -- I can't tell you the customers -- but for example, one customer informed us, based on some improvements we had made on a product for them, that their overall process had improved 30 percent. Another customer who is working with 300 millimeter improved their yields from 50 percent to 70 percent.

So if I was going to summarize, what we are seeing are the short-term effects of these yield improvements. We believe that most of our customer yields are relatively high on 200 millimeter platforms, well above 80 percent, maybe into the 90 percent. We do see some customers that still need yield improvements on 300 millimeter, and I gave you an example there. And so we do expect going forward to see some improvements in yields, not to the kind of magnitude we have seen recently. And so we do expect to see an uptick in our copper growth as the ramp continues, as the second wave of customers introduce 130 nanometer technology and as we begin to see the adoption and ramp of 90 nanometer. In terms of the second question around inventory, I might ask Bill to respond to that.

If we look at our largest customers in copper, in particular, in a couple of situations, we saw pretty clear evidence of a reduction of slurry inventories during the quarter. We don't have a sense that inventories are unusually high now, so we think that correction should be behind us. But it was pronounced in a couple of different cases.

Look at something more exciting, if I look at your margins X the charge, it seems that some of the manufacturing efficiency goals that you have had are paying off ahead of your expectations. Am I reading that right, or is this the mix of some of the new tungsten and oxide products flowing through your gross margins in that segment?

The way I would answer your question is the first part, we are making progress on our manufacturing process. We have a great team, they have made a lot of progress. I would like to caution us though that we still have a ways to go. There is still a lot more work to be done. We're going to see even more challenges as we get into 960 nanometer. I think we're going to see the technology constraints be more severe. So I think what you're seeing is the team is doing a great job. They are rallying to the challenge, they're making improvements in the process and we're seeing those effects. But we will continue to need to invest and we will continue to see some of effects as we go forward with the introduction of 90. So that's why we have kind of given our guidance of keeping the perspective, the gross margins of 50, plus or minus two.

Thank you very much.

Suresh (indiscernible), Think Equity Partners.

In terms of -- do you think at this stage that most large chipmakers have pretty much decided on their 130 nanometer suppliers? Do you think there's still people evaluating their options? And an additional part of that same question is -- how do you think the decision would change at 90 nanometer, and where do you think we are right now?

Let me address the first question on 130 nanometer. The first wave of customers happened 2001, 2002, and it would be half a dozen to a dozen manufacturers adopted copper. And that is what the bulk of the growth has been. Somewhere about a dozen customers are using copper at 130, and we think they will continue to ramp that technology. We do believe there are a host of other customers, and we call them the second wave, that will start bringing in, bringing up 130 nanometer technology with copper. We have same this last year a trickle of new activity at a couple customers that have ramped copper technology, have begun ramped (ph) copper technology. We are doing a lot of work probably with about 30 other customers on the 130 node, and we do expect as the industry picks up, we will see more people adopt 130 and ramp 130 and make the investments in order to do that. We think the downturn and the slow recovery has delayed that. Does that answer the first part of your question?

It (indiscernible). (indiscernible) do you think there's a change when we go to 90 nanometers, anything we should be looking at?

The two things that I would say is -- you're going to see a smaller group bring up 90 nanometer technology than the original 130. I think 130 was fixed a little more to a dozen, somewhere in that order. I think we're going to see a smaller group bring up commercial 4, maybe 5 max -- will be the leaders, and we think it will happen slower than as expected. I think it is a severely challenging technology.

In terms of our view, we have been working actively on 90 nanometer technology for many, many, many years with our customers. I think that we have a two-pronged strategy. One is -- we are making improvements in our 130 technology. And as a result of those improvements, we are meeting the performance requirements at some customers for their 90 nanometer technology. So we're going to see some customers adopt our products automatically into 90, and it will be a smoother transition for them, given their amount of experience in data.

We also have new technology that we have been working with customers, and as we said in the call, we have two customers who are in precommercial ramp right now and we expect others to adopt and we are making progress on barrier.

The other major event that seems to be happening is flash suppliers trying I guess to go to copper to use (indiscernible) instead of standard (indiscernible). And I was wondering which would give you a bigger bang for the buck, because (indiscernible) slurries I guess are much more expensive than (indiscernible) oxide slurries, and copper of course is a growth opportunity. Any comment on that?

We would probably -- replacing low K with oxide, there is an opportunity it will be a cannibalization, whereas flash copper would tend to be a growth opportunity.

Great. Thank you.

John Roberts, Buckingham Research.

Is Dr. Perry going to work full-time on this strategic technology fellow position for Cabot Micro?

Yes she is.

I don't think you gave us an R&D budget for '04 here as you -- you get the Asian build out of your clean room capabilities?

Let me have Bill make a comment. He will probably not give you the details of R&D, but the break out of the whole SG&A R&D.

With respect to SG&A, our spending level in the third quarter was -- I'm sorry -- fourth fiscal quarter was $20.5 million, and we think we are at roughly the run rate that you will see through fiscal 2004. Matthew talked about our hiring people in the downturn to build staff and expertise, and I think you could maybe characterize that we've pre-spent (indiscernible) the 2004 budget to get to that spending level now. So what you should see going forward is SG&A spending approximately at the $20.5 million level per quarter, with some modest trending upward into the second, third, fourth quarter based on the level of spending in the Asia-Pacific effort around the clean room facility there, as well as our utilization of the 300 millimeter polishing tool in our clean room.

So it's really not a big ramp-up in spending to do this?

No, it should not be.

Does it show up in the capital budget as you buy metrology equipment and so forth for (ph) the Asian Center?

That's right. Our capital budget for 2004 should be around $25 million, and that would be the two significant elements -- I'm sorry, $22 million -- and the two significant elements of that would be equipment for the clean room facility in Asia, as well as some manufacturing capacity expansion.

Matthew, how should we think about the ramp of STI (ph) slurries? Is it going to be similar to the ramp-up (indiscernible) copper had? It is a fairly broad application over time, isn't it?

It's a very broad application. It will be in all devices. I think how rapid the growth will be will be the adoption rate. Will everybody at 90 nanometer go to direct STI -- is kind of the question. The second one is -- will they back-integrate, and we have one customer who is going to do that and is committed, so that would add to the growth. Some may wait until 65 nanometer, and that would tend to slow the growth. But it is a great opportunity, it is a huge value proposition for our customers and we're really excited about the progress we have made and the performance we are seeing.

Is it fair to say that you're not going to break out either STI or CABs (ph) until they have become material to sort of track them like you do copper?

That is correct.

Thanks.

Jerry Fleming, Oppenheimer.

Good morning, gentlemen. A couple of questions relating to copper and the drop-off in the revenues there. You mentioned yields as one of the factors. Is that strictly just the number of good die that you're getting per wafer, or does it also mean that you're using less slurry per polishing step?

When we use the word yield, we're implying the number of good die per wafer.

So the amount of slurry that people are using on a particular step hasn't decreased?

No. Let me just give you an example for the customer. For the customer, for example, let's say if their yields are at 40 percent and they have 100 die per wafer, they are making 40 good die per wafer. If they can improve their yield to 80, they just doubled the amount of die that they can sell and they're using the same amount of slurry, and that is why there is a disconnect between our sales and our customer's sale. Now as they get to high yields, that will stop. And so initially, they are buying more slurry because of their lower yields, and then as they improve yields, they need less slurry per wafer, but -- are you following me?

I am following you. Taking it a step further as you go from 200 to 300, does the amount of slurry per potential die decline?

That is true. What happens -- when you go from 200 millimeter to 300 millimeter wafer, the amount of slurry per wafer goes up and we think it goes up about 50 percent on average, depending on the platform. But the number of die per wafer goes up by a little over 2. So the slurry consumption per die does go down.

One other question on copper, and that is with your gross margins moving up something like 250 basis points excluding the charge and your copper business down and your other business up, is it fair to assume that your margins are lower on copper than they are on oxide and tungsten slurries?

I will let Bill answer that.

In the past, we have not talked specifically about pricing by application or margin by application. I think we've characterized -- the pricing and margins tend to be higher on the newer applications. This time, we saw sort of an adverse product mix, with respect to pricing, but an improve product mix with respect to gross margin. And so you can draw some conclusions about the margins, but we really haven't called that out specifically.

Lastly as we go forward in here and you get into your pad ramp initially with some pads in which you are a reseller, is that having a negative impact on your gross margins for a couple of quarters, and what happens then as you start shipping your own pads?

What the trend will be, it will initially, the gross margins on our pads will be lower than our slurries, so it will have the effect that you are inferring. As we start selling our own pad technologies, we expect the margins to be comparable to our slurries, and so you will see a rebound due to that effect.

When does that transition occur, ballpark?

It will not happen in 2004. The bulk of our sales will be from the value-add reseller business. In 2005, we expect to start seeing some transition.

Great, thank you very much.

Jeffrey Cianci, UBS Warburg.

Question on inventory swings. We've seen a lot of volatility. I recall was it last June, so you made like 54 cents. People were ordering extra. Now they're drawing it down. Have you been able to quantify this inventory swing quarter-to-quarter? It strikes me that we've seen it as low as 35 cents a quarter in earnings when they're drawing it down, as high as 55 cents when they're building it. Does it imply that this is a more normal condition right now?

If you look back at -- the June quarter you're talking about is 2002 where we ramped up volumes by 35 percent -- or revenue by 35 percent from the previous quarter to the June quarter, right?

Right.

And this year, I think -- yeah, our sense was the industry tended to be much more cautious about inventory build and mindful of what happened in 2002, so there's probably less of that. But if you look at our copper sales in Q2 and Q3, they are up -- I can't recall exactly -- about 14 and 18 percent, something like that, in consecutive quarters. And if you look at consumption of some of our customers, the conclusion is that there was some inventory draw in a couple of places. It was not across the board, and I don't think we're seen that it's a similar situation has occurred this time last year. I think it is more situational.

Your customers appear to be doing better now, but you're saying from listening to them, you're saying they are not ordering slurry?

No, and I don't want to make a broad characterization here. This is -- in a couple of instances, we saw two or three instances where we think there was some drawdown of inventory that may have grown a little bit too high in the prior quarter, but it is not a characterization across our entire business or across the industry.

(multiple speakers) you meant to quantify what the pads business would be? Is it more '05 than '04? How quick can the ramp be?

We have expectations that the pad sales in 2004 will be substantive.

Substantive -- what is that -- I looked that up in the dictionary.

We've never given an exact number, and we tend to not give exact numbers. What we are saying is that it will be measurable and we will talk about it.

Will it be bigger than data storage?

I can't get into the details.

(MULTIPLE SPEAKERS).

Long-term, it has the potential to be much bigger than data storage. It's a large market, we have -- we are making a lot of progress, we're very excited about where we are, we have three customers who are through qualification, and we have multiple other customers in qualification. There's a lot of pull. So we're excited and we are working aggressively globally to penetrate the market, so we have a lot of expectations this year for 2004.

I will leave you with the comment that your stock gets hurt, as you can see, by not really giving much of an outlook, where other customers and some of your competitors do, and so uncertainty reigns when we've been mired in this same sort of earnings progression for awhile now. It's really a comment more than a question.

We appreciate it.

Thank you very much.

Jay Harris, Goldsmith & Harris.

Good morning, Matthew. I caught an inference in your presentation, early in your presentation that there was perhaps a geographic mix change in your revenue base in the September quarter versus the June quarter. If that is true, I wonder if you could share with us what the geographic distribution of your revenues were in the September quarter?

I don't know that we've made a lot of references about the geography. What has historically been, what we have seen over the last two quarters, last three quarters is the strongest growth area has been Asia-Pacific, which is consistent with what you are seeing in the overall industry.

What percentage of your revenues does that region represent?

Today -- Bill will give you a hard number -- but it is over 50 percent is Asia-Pacific, and it has been growing every year.

This quarter haven't (ph) gone through the transition from distributor to direct sale, which impacted Europe and southeast Asia, most notably. Our biggest growth area was the recovery from that event. And so our strongest growth was in Europe and southeast Asia. With copper declining slightly, the growth was mitigated kind of elsewhere.

Could you give us approximate numbers as to what Europe and Asia-Pacific represent?

Europe is around 11 percent of revenue.

How much (inaudible) a breakdown.

Europe is around 10 percent, Asia is around 60 percent.

How has that changed over the course of the year? In other words, if we went back to '02, what would you -- how would you have answered that question?

Asia would've been closer to 50 percent and Europe would not have changed all that much.

I take it -- is this a trend that you think is going to continue going forward?

I think you have to look where the installed base -- what drives that is where is the installed base of the leading-edge technology?

It seems to me it is sort of a -- there is a mix. One is the -- technology may be adopted more easily in the U.S. and Taiwan than elsewhere in the world. And so do -- you have several things that effect the -- apart from wafer starts that effect the geographic distribution of your business.

I think you have very good insight on it. The technology leaders is really where you're going to see the growth of capacity. You've got some strong technology leaders in the U.S. that are going to continue to build in the U.S. Taiwan is another area we are seeing some, which is surprising leading-edge technology in China. We do have a customer there that is using copper. And so when you ask where's the growth going to be, you will continue to see it be driven by the technology leaders, and it is where they decide to do their manufacturing and whether some of the U.S. manufacturers will build facilities outside the U.S. or do joint ventures will really determine that.

Looking forward, you have mentioned a number of things that will contribute to revenue growth in '04. Could you go over that list and start with the -- what you consider to be the items at the top of the list that contribute most to revenue growth and those that you have mentioned that will contribute less than that, down towards the bottom of the list? Could you just sort of rank that for us?

I don't know that I will get the ranking perfect, but let me just go high level and they're not going to be in as tight an order as you would like it. We expect continued growth in copper, continued ramp of 130 and the second wave of 130 and the adoption of 90 nanometers. We expect growth out of the direct FTI as that gets adopted and ramped and if the gets back integrated. We expect good growth in the pad revenue, would be the third. We have some real potential with this new technology in the data storage area, around the first-step technology. Surprisingly, in one quarter, that customer ramped that product from zero usage to 100 percent usage on their 80 gigabit, which is unusual, so it says a lot about that technology. So we think there's good growth there. That's the fourth area. And then we have our other two businesses -- tungsten, which will see some growth with leading-edge technology and oxide.

Finally --

We don't expect to see, even though we have good position noble (ph) metals, we don't expect to see any growth there, but we're already in the process of completing a joint development agreement, and we are ready meeting the targets of the scope of program. But we don't expect to see that become commercial in 2004.

Do you measure your revenue growth against some indication of wafer starts?

We don't -- some companies spend a lot of time tracking all of that. What we tend to do is watch what our customers are doing, watching at the customer account level activity. So we monitor what's going on account by account and application by application. We don't spend a lot of time, because most customers don't share the details of their actual wafer starts, so they are not a good indicator, as tight an indicator of what's going on in our businesses is actually looking at what each of the customers' doing.

I know in past presentations, Matthew, you have given out data and projections, I think, or alluded to projections of adoption, in terms of a feature size and where the momentum in the market is likely to be, relative to the way your products are oriented to. And I wondered if you could send out to the analysts some update on those kinds of indicators?

I think that is a good suggestion. Let us think about it and we will see what we will do about responding to that request.

Thank you very much.

Operator, we have time for one more question.

Ted Berg, Lehman Brothers.

Thank you. I had a quick follow-up question on inventory level questions at the couple of customers that are drawing them down. Are they drawing down their overall consumable inventory levels, or are these just Cabot slurry inventory levels that are coming down? I'm just (indiscernible) how are you certain that it's not due to them qualifying other customers and beefing up inventory levels on those products while they draw down your inventory levels?

I will probably give you one example, and I don't want to go into a lot of detail, because it gets into confidential. In some cases, some of our customers have external companies managing their inventories. And in our second quarter, they let the inventories get low and the customer got very upset with them. So they wanted to make sure it was not going to happen again, so they over ordered in the third quarter. And we talked to the customer and said, hey, this is out of line, you are building up too much inventory. And it was a three-party discussion. And so that is an example of why we're talking about the inventories got a little high. And it is no -- we think it has nothing to do with their change in their philosophy about how much inventory to keep or a change in that they are qualifying or going to ramp another customer. They are in the middle of a ramp, and that's a time when you don't make changes.

One final question was -- is there any way -- I know a lot of companies obviously don't like to disclose specific customers who they're dealing with, but if we looked at, say, the top 15 chipmakers out there working with copper today, how many of those about 15 would you be qualified for your copper slurries for 130 nanometer, and then how many at so far at 90 nanometer would you be qualified at that have had qualified people already for 90 nanometer?

I can't give you hard numbers. We've kind of moved away from talking about market share. What I will say is that we're working with all of the top 15 semiconductor manufacturers. We have a very good position on 130 nanometer. I have described and talked about how much improvements we have made in our 130 nanometer technology. That is helping them benefit, so not only are we securing that business and creating real value for those customers, but some of them are now taking that platform and extending it into 90 nanometer. And then we have technology for 90 nanometer that is in precommercial ramp.

I think what makes it confusing for the investment community and for the supplier community as well is, when does the customer make the final decision. And I think there's a lot of information out there about -- and let me break it down as there is an evolutionary process. Usually, they have a POR (ph) they start with, which is usually the technology that they're using now for -- let's say for what they're using in 130, they use it as a process at 90 to do their early development. And if it meets it, then you are locked in. And so we have made improvements and that is helping us. At some point, they'll do sampling and benchmarking of other suppliers just to get a sense of what kind of technology is out there, do they have the best performance, look at are they getting a reasonable cost of ownership. So there can be a lot of benchmarking going on, there could be even cases where there's qualifications going on. But the customer is going to make the decision really based on three major requirements, and I think I stated and before.

First of all, they're looking for the best performance. As I said earlier, the performance of the product has a huge impact on yield, and yield really cost the customer if they have low yields. The second one is they need to know that supply assurance and that the quality is going to be there and the technical support is going to be there. And I think that is becoming more of an enablement than it has ever been before. The technology is getting more complicated and more demanding. If you think about it, you're taking an 8-inch or a 12-inch wafer and polishing at an atomic layer, and so you need to have incredible control of your product during manufacturing. You're controlling every aspect of it. And so that is very important to the customer. And the third one is the cost of ownership, which is partially driven by price, but mostly by performance. And so most customers are keeping pretty close to the breast about what they're doing. You do hear a lot about discussions about a lot of evaluations going on, and we think that is good business practice for our customers to do. But it makes it challenging and difficult for the investment community and for the supplier community to know exactly where they are and what their decision is. And all we do is work really closely with our customers and drive improvements in our existing products, roll out new products and we have technical people all over the sites and we have our businesspeople all over the sites making sure that we're doing everything we can. That's a long with a response your question.

Okay, thank you very much.

We have run out of time, so I would like to thank you this morning for your interest in Cabot Microelectronics. I look forward to speaking with you again soon. Thank you, Brandy.

Thank you for participating in today's Cabot Microelectronics conference call. This call will be available for replay beginning at 12:30 PM Eastern time today through 11:59 PM Eastern time on November 6, 2003. The conference ID number for the replay is 743-6284. The number to dial for the replay is 1-800-642-1687, or 706-645-9291. This concludes our conference. You may now disconnect.