CMC Materials, Inc. (CCMP) 2004 Q1 法說會逐字稿

Good morning and welcome everyone to the Cabot Microelectronics 2004 first quarter earnings release conference call.

[Operator Instructions].

Thank you. Mr. Bill Johnson, you may begin your conference.

Thank you. Good morning. I'm Bill Johnson, chief financial officer of Cabot Microelectronics Corporation.

With me today is Bill Noglows, chairman and CEO to host this earnings conference call for the first quarter of fiscal 2004, which ended December 31, 2003. Bill 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 first quarter of fiscal 2004, a copy of our press release is available in the investor relations section of our web site at Cabotcmp.com or by calling our investor relations office at 630-499-2600.

Today's conference call is being recorded and access will be available for two weeks, via telephone playback, the play back numbers are 800-642-1687 in the U.S. or 706-645-9291 internationally. And you will need access code of 4711006. Play back will also be available via Web cast for the next two weeks in the investor relations' section of our Web site, along with a script of this morning's formal comments.

I would like to remind you that our conversations today may include forward-looking statements that involve a number of risks, uncertainties and other factor that's could cause actual results to differ materially from these forward-looking statements. These risk factors are discussed in our SEC filings, including our report filed on form 10-k for the fiscal year ended September 30, 2003.

We assume no obligation to update any of this forward-looking information. With that said, I would like to review our financial performance, then Bill will provide a business review. Afterwards we will take your questions.

Total revenue for our first fiscal quarter was $76.3 million, up 12.3% from the $67.9 million we reported for the prior quarter. We experienced revenue growth this quarter across all of our application areas and geographies.

Total revenue was up by 33.2%, versus same quarter of last year. Recall that during the year ago quarter the semiconductor industry saw dramatic falloff in business following the false recovery of the June and September quarters of 2002.

In our IC slurry business, revenue from products for polishing copper interconnects increased by 5.6% from the prior quarter, and increased by 29% from the year ago quarter. Bails of copper slurries represented 21.3% of revenue this quarter. Revenue from Tungsten and oxide CMP slurries taken together was up 14.1%, in addition, our data storage slurry business grew by 13.3%.

Our average sales price for slurries increased 2.8% over the prior quarter. This was primarily due to benefits of a higher value product mix and the strengthening of the Japanese yen versus the US dollar. Partially offset by the impact of some selected price reductions.

Gross profits for the quarter was $37.3 million. Up by 8.2% versus the prior quarter. This represents 48.8% of revenue compared to 50.7% of revenue that we reported last quarter. This quarter gross profit was adversely affected by higher manufacturing and other product costs, associated with median meeting customers ever increasing performance requirements for our products. These higher costs are related to lower yields and our manufacturing process, increased product warranty costs, and higher freight costs. A similar cost increase last occurred in the March quarter of fiscal 2003, during which we reported a gross margin of 48.9% of sales.

As customer requirements intensified, we continue to invest in manufacturing capabilities to meet continuously increasing customer demands for higher product quality and greater product consistency and we may experience similar periods of higher manufacturing costs in the future, as we continue to respond to these more strenuous requirements.

Partially offsetting these higher costs was the benefit of greater capacity utilization due to the increased level of sales this quarter. This quarter also benefited from the absence of the $2 million charge that we reported last quarter, related to a minimum purchase obligation associated with an older polishing pad technology that we are no longer pursuing.

Let me turn now to operating expenses, which include research and development, selling, marketing and general and administrative costs. Operating expenses this quarter were $19.7 million, which is $800,000 lower than last quarter, and $4 million higher than the comparable quarter last year.

The major cause of the sequential decrease was a lower level of expenditure on R&D supplies, due to the timing of purchases of waivers, which we used to test our products in our polishing metrology clean room facility. This decrease in R&D cost partially offset by a modest increase in staffing costs.

Operating income for the quarter was $17.5 million, up by 25.8% versus the prior quarter. This represents 23% of revenue, which is up from the 20.5% of revenue that we reported last quarter. The increase in operating margin this quarter demonstrates the operating leverage of our substantial investment in research and development and other operating costs, which are primarily fixed costs to increasing sales levels.

Our effective income tax rate for the quarter and our expectation for the full-year is 34%. We continue to benefit in the first fiscal quarter from the tax credits on research and development spending that we discussed last quarter. Our full-year tax rate forecast reflects the anticipated June expiration of the current related tax legislation.

Net income for the quarter was $11.6 million, up by 20.2% from $9.6 million last quarter, and up by 25.1% from the $9.3 million in the same quarter last year. The weighted average number of shares outstanding on a diluted basis was $25 million this quarter. Diluted EPS for the quarter was 46 cents. This compares favorably to the 39 cents per share we reported last quarter, and 38 cents in the year ago quarter.

Now let me briefly cover cash and balance sheet related items. Working capital increased by $1.2 million or 3% this quarter, due to the higher level of sales. Both days of sales outstanding and accounts receivable and days of inventory on handy decreased this quarter. Capital spending for the quarter was $1.3 million, as we made modest investments in R&D and manufacturing areas.

Depreciation and amortization was $4.2 million for the quarter. Our full-year forecast for capital spending and depreciation are $22 million and $19.4 million respectively. We ended the quarter with $127.4 million in cash. $16 million higher than last quarter. Total capital lease obligations were $8.8 million, and we have no long-term debt outstanding.

During the first fiscal quarter we renewed our revolving credit facility in the amount of $50 million. We also recently executed an extension to our supply agreement with Cabot corporation, which provides better supply assurance, reduced cost risk and additional benefits related to quality that support our operations excellence initiative. This concludes my financial review; I will now turn the call over to Bill Noglows for a business update.

Thank you, Bill. Good morning. I have been recently rejoined Cabot Microelectronics in early November and this being my first discussion with you in my new role, I would like to open this business review with a few comments on how I intend to lead our company going forward.

Since early November I have met with a number of customers and with our employees and all the regions of the world in which we operate. And have been reviewing our business and operations. I want to emphasize that I believe our company strategy remains sound and we will continue to pursue that strategy with intensity and passion.

Our continuing primary goal is to maintain and enhance leadership in CMP slurries. Re fundamentals continue to underpin this goal.

First, we will continue our deep commitment to research and development in technology.

Second we will continue to build our manufacturing capabilities to achieve operational and service excellence around the world, and third, we will continue to intensify our focus and attention on serving and partnering with our customers. While you may see some tactical changes in our execution of this strategy, the foundation remains unchanged.

Beyond these three core principles, we also intend to continue to broaden our business through leveraging technology and market channels. Our efforts in data storage and polishing pads are two good examples of this broadening strategy, and we will continue to look for similar opportunities going forward, both through internal, organic development and grow as we have done in the past, as well as through licensing technology, enabling acquisitions and alliances.

Along with our commitment to stay in this strategic course, there are areas where we need to improve and change. To facilitate these changes and improve execution and speed to market, I have made a few additions and changes in the executive management team, which I would like to mention briefly. In December, we hired Cliff Spiro as VP of R&D, which was previously announced. I am delighted to have Cliff join us; he brings a great deal of experience and leading large global R&D organizations.

I look to Cliff to bring a fresh perspective to our research and development efforts and assure the company is positioned to support customers from a technological perspective as they drive to smaller and smaller feature sizes. We have a team of very talented scientists and technologists, which we believe is the absences of our competitive advantage. I'm confident understand Cliff's leadership we will continue to be technology leader in the field of CMP slurries.

Last week I made several other changes to our executive leadership team that while significant I would characterize as evolutionary rather than revolutionary. First I'm pleased to announce that Dan Pike, who has done an outstanding job as vice president of operations, will move to a new position of vice president of corporate development. In this role Dan will be responsible for our business development and corporate strategy activities.

While historical focus has been on internal and organic growth and development, we want to supplement this organic approach with a more formal focus and process to review external growth opportunities. Given Dan's extensive experience in operations, marketing, commercial areas, he is uniquely suited for this role. We have undertaken a search for Dan's replacement of vice president of operations.

Jeremy Jones who has served as vice president of new business development has announces his detentions to leave our company.

Second, with the increased importance of the Asia Pacific region to the semiconductor industry in general, and in to our business in particular, we have determined that we need to move more deliberately and decisively in developing business in Asia.

In response to this need Dan will relocate to Shanghai, and assume the role of vice president of greater China and Southeast Asia.

Dan has been with our business since its inception, he is currently corporate controller and you will recall he was acting CFO for a six-month period last year. Many of you on the call know Dan whose interactions with you through analysts and investors and you understand that Dan skills go well beyond accounting and finance. Over the years Dan has been intimately involved in a wide range of commercial areas in our company and I am confident Dan can help provide additional executive leadership in Asia.

Dan will work with Asia Pacific team and (inaudible) our vice president of northeast Asia to develop full product and applications support capabilities in the region. This locally based support will improve ability to serve our customers, augmenting our slurry manufacturing facilities in Japan, and our existing sales and support infrastructure throughout Asia.

We expect to announce that replacement for Dan in the near future, in the corporate controller role. Finally, Michael Jenkins served as vice president of human resources also announced his desire to resign from our company. We have commenced a search for Michael's replacement.

I believe that these leadership changes combined with internal business realignment around the applications we serve will provide greater focus than accountability, help reinvigorate efforts toward successful execution of our strategy, and increase the speed and pace at which we bring new process to hook solutions to our customers enabling and helping them to continue the progression of Moore's law.

I would now like to provide with you an update on the status of our business beginning with our slurry products for copper. CMP slurries for copper interconnects remain a very high priority for our company. Copper CMP technology has proven to be a very challenging and competitive application for our industry.

I have heard one industry expert characterize copper CMP is having low barriers to entry, but high barriers to success. Although we believe we have been successful in copper CMP, we continue our efforts in technology development and operations excellence initiative that are so critical to sustained customer satisfaction and service in this area.

We continue to have business development teams working on applications at the 130, 90, 65 Nanometer nodes and our Concurrent we're working on fundamentally new enabling technology platforms for 45 nanometers and beyond. We believe we have clear leadership in supplying CMP slurries for polishing copper at the 135-nanometer nodes were essentially all commercial activity and copper currently resides.

Of the 7 technology leading semiconductor manufacturers, six are active in logic devices, which utilize copper wiring at 130 nanometers. We believe we are the leading slurry supplier at five of these six manufacturers. Our current strength lies in copper removal and less so in barrier removal however we have a commercial position in barrier slurries and have promising development activity in customer engagement in this area. There is clearly a great deal of development activity where our customers at the 90-nanometer technology for logic devices using copper interconnect.

We believe there are five technology leading semiconductor manufacturers in various stages of qualifying and ramping copper technology at 90 nanometers. It appears that the technical demands at 90 nanometers are such that there was no common CMP solution on emerging, varying requirements by customers; our driving customized solutions and we believe that no single CMP slurry provider has a commanding position at 90 nanometers.

We have been selected to supply two of these five technology-leading customers and are still in evaluation a third customer. Two semiconductor manufacturers have selected other slurry suppliers at this point in the introduction of this technology.

Beyond these technology leading companies we are continuing to work with a broader set of customers, beginning to implement copper technology at 130 and 90 nanometers. We intend to fully engage with all semiconductor manufacturers that are adopting copper technology and look for opportunities to provide value to them as they ramp the high volume production.

Semiconductor industry has seen severe technical challenges in ramping copper technology at 130 nanometers. Helping to solve technical problems of our customers required depth in all aspect of CMP technology, as low as close collaboration between our customers and us. We expect the challenges of ramping 90 nanometer technology from pilot scale to high volume commercial production will be even more severe than at 130 nanometers.

Given our successful track record of supplying copper slurries in commercial scale quantities at the 130 nanometer know, we believe we have demonstrated technical capabilities and leveraged our global support and manufacturing infrastructure which others in our industry do not have.

As the challenges of ramping 90 nanometer copper technology become more apparent, we are eager to bring our substantial technology and operational resources to bear to support the semiconductor industry in meeting the challenges of advanced copper technology. Beyond the 130 and 90 nanometer technologies, we are also making progress on the development of our 65-nanometer copper technology. Currently we are engaged with two technology-leading customers at this node.

Now let me turn to tungsten and oxide. Revenue from our slurry products for polishing tungsten and oxide taken together increased sequentially this quarter by 14.1%. With the increasing adoption of copper wiring, we anticipate some adverse impact on demand for tungsten slurries.

However, we look for continued growth opportunities in tungsten consistent with general market growth as well as through growth in leading-edge technology such as memory devices and in the front end of logic devices using copper wire. We have traditionally held a very strong technology position in tungsten slurries and tungsten remains a very successful application area for us. We have continued to innovate to maintain leadership in this business area as competition in tungsten CMP has intensified.

We're working with a number of technology-leading customers with a new product application at both the 90 and 65 nanometer nodes; we expect this new product to provide performance improvement. Early the evaluations are promising.

In oxide we continue to work on improving our existing products to maintain our position in this application area. We also continue the development of a new product that we think will provide an attractive performance and value proposition for customers. Customers are currently evaluating this product, which we plan to commercialize later in the calendar year 2004.

Next let me update you on our new product for direction shallow trench isolation or direct STI. Last week we announced the adoption of a technology leading customer of our select 6,000 product for direct STI in conjunction with our policies that, in a consumable slurry pad set technically optimized for this 90 nanometer application. We have just been qualified with a second customer at 90 nanometers and a number of other companies are active in evaluating both, for both 90 and 65 nanometer devices. Move on to data storage.

As Bill Johnson mentioned earlier, revenue from our data storage business grew by 13.3% this quarter. Data storage is represented in an interesting technology extension opportunity, where we were able to leverage our IC CMP slurry expertise. We are now selling slurries for 40, 60, 80 gigabyte applications at a number of key customers. We also introducing a new product for 120-gigabyte disk technology. There is currently a great deal of product development activity within our data storage business where we are cost effectively customizing specific products for individual customers by application.

Next let me update you on our polishing pad business, where we're executing a two-pronged strategy. First as evaluated reseller of pads produced by a third party and second, internally developing pads of our own pad technology. Our announcement last week of the adoption of our Slurry pad set for a technology leading customer, 90 nanometer application is an early example of overall goal to provide technically optimized consumable sets and process solutions to our customers.

In the role, evaluated seller, we currently have commercial sales of pads to a number of customers and several more customers are currently ramping. Beyond existing customers, approximately a dozen customers are evaluating our products on a range of application and still more companies are sampling. We believe that our pads offer better quality, consistency and reproducibility than many competing pads.

In a recent marathon test of our pads with a large semiconductor equipment manufacturer, our pads demonstrated significantly longer pad life than those of the competition. Using the second, the second pronged of our pad strategy, we continue to develop a range of pads utilizing our own pad 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 calendar year.

Now I would like to offer some concluding remarks before we open the call for questions. Many of our customers are reporting increases in their sales and in our first fiscal quarter we saw an increased demand for our products. As we look at orders for our products during the first three weeks of January, we see business activity roughly on par with the same period in each month of the December quarter.

However, the first three weeks of sales out of a quarter represent only a limited window on quarterly results. In the last several quarters we have provided near term guidance on gross profit margin in the range of 50%, plus or minus 2%.

This guidance has been based primarily on two factors, which we have discussed with you in the past. First, the cost impact of meeting the ever-increasing requirements of our customers for quality and consistency of our products.

And second, the continuing competitive environment with respect to pricing pressure. We are maintaining this guidance on gross profit margin.

We believe the compelling growth drivers for CMP materials continue to provide an outlook, attractive outlook for the CMP industry. This growth outlook has naturally attracted a host of competitors.

However, we believe that no other CMP supplier has the track record we do in meeting the performance demands associated with developing advanced technology, improving existing technology, and successfully meeting the ever-more stringent product performance requirements of the Ic industry through sustained high volume manufacturing.

Other abilities to perform at this required level is uncertain. A competitor whose product may look promising on a pilot scale may have difficulty scaling up to meet very different demands of the IC manufacturers in day in, day out high volume production, and providing the necessary technical and manufacturing support on a global basis.

I would like to close with the following: I'm very excited about the future of this business and what I have learned during my short time here. The intellectual and technological capabilities of our people are second to none, and combined with our global manufacturing support infrastructure, we are well-positioned to continue to serve our customers in all parts of the world and to capitalize further on opportunities for growth as CMP technology continues to develop and expand. I would now like to open the call to questions.

[OPERATOR INSTRUCTIONS].

Your first question comes from Suresh Balaraman with ThinkEquity.

Good morning guys.

Good morning Suresh.

In terms of December, it appears that many fab shutdowns and preventive maintenance were deferred to the March quarter, I'm wondering if it's starting to have an effect on your January numbers, because the Chinese new year is going on now and if it's reflected in the January numbers. I have a follow-up after that. Also I was wondering if there would be a negative impact on the March quarter?

Sure, if you look at the last several months, we have had, or several quarters, our, the sales distribution throughout our quarter is relatively uniform, tends to be 1/3, 1/3, 1/3 on revenue throughout the quarter. As we look at the first three weeks in January, we're seeing the same sort of level of business in the first three weeks of January as we saw in the first three weeks of the month of the December quarter, so we don't, we haven't seen any impact of that to date in this quarter.

Also, can you comment on your 130 nanometer position and 90 nanometers in terms of how much of the top 20 have chosen 130 and where do you think your position is likely to end up at 90. It's hard to answer the question, but can you give us qualitative insights on that?

I guess we feel like we took a big step forward talking about our position this quarter with technology-leading companies. We think there's a second wave both at 130 and 90, that's occurring right now. We think that we're satisfied with our position in 130 going forward as well, with the second wave. In terms of 90, you know, we're seeing different technology demands among different customers for sort of customized solutions and as we mentioned in the text, there's no single CMP provider who seems to be having a commanding position at 90.

We're happy with our position at two of the top five. We're continuing to work on a third and would look for opportunities to supply clearly the entire industry. But we think 90 will be challenging going forward, even more challenging than 130 was. And so our intention is to aggressively compete for the leading share of the business.

Is there like one number to that you have? I know Rodell is probably - Rodell or Hitachi is probably the closer to number two (ph). Do you see new entrants challenging that position and emerging as the number two in the CMP slurry space?

We don't talk about competitors on the call and we have a history of not talking about competitors and I think it's a good practice.

OK, great. Thanks, guys.

Thanks, Suresh.

Your next question comes from John Roberts with Buckingham Research.

Good morning, John.

Good morning. There has been a significant rumor about you losing material piece of business after March, you're commenting specifically on new wins. Would you make any comments at this point whether you know whether or not you're going to have any business dropping off?

At this point in time we don't have visibility in to the future. I would like to comment on some of the speculation about 90-nanometer technology and where we see things today. I think as we all know going from lab to pilot to ramp to commercial in our history with ILD, history with 130 nanometer copper, making that extension from laboratory scale to commercial scale is fraught with obstacles and problems along the way, both for our customers and for the CMP suppliers. And, you know, as we sit here today and look at our position in 90 nanometer, we would expect as time goes on to see switches, changes, moves back and forth and on both sides.

We might be vulnerable if two accounts where we have a position and we might see opportunities at the two we mentioned. And then when you sort of disaggregate at the customer level, every customer has a different process for making decisions and every customer has multiple fabs with multiple lines, different products and different nodes. So it's simply not an on/off decision as I see things, John.

Secondly, for the two 90-nanometer copper customers that have been awarded to competitors, are you qualified at those customers in case the competitors can't meet the requirements?

I don't think we can really comment further on where we are with the customers. I think that what we would say is given our position at 130 and the leading position we have through the difficult ramp of that, we're probably best positioned to provide at 90.and So we're actively working to get, you know, for engagements with all the technology-leading companies, you know, to expand our business at 90 nanometers. So where we have been selected we're happy. Where we haven't been selected we will continue to work to try to insert ourselves in to their process.

Great, I'll get back in the queue. Thank you.

Thank you.

your next question comes from Jay Harris with Goldsmith and Harris.

Good morning, Bill and I Welcome to your first conference call.

Good morning, Jay. Thank you.

What percentages of your sales are in yen?

There's about 15% of our revenue is yen, yen denominated. We did have a benefit on revenue this quarter associated with the strengthening yen, because our sales, within Japan, are denominated in yen. Elsewhere in the world it's predominantly U.S. dollar-based.

So there was a modest impact on revenue with respect to foreign exchange changes. In terms of margin impact, though, there wasn't really any significant impact because we're sort of naturally hedged to the extent that we have 15% of our revenues in yen we have also locally-based costs in Japan that are yen-based. So there's sort of a natural hedge there on margin.

Could you translate that 15% in terms of the revenue gains, sequential quarters? For the December quarter?

Yes, there's approximately $800,000 impact.

OK, Kind of small.

Yes, it's relatively small. Like I say, the costs are about equally matched to that. So there's a very small margin impact.

I noticed in the 10k that for several years now you have been providing Cabot Corps on a monthly basis, I think, was forecasts of requirements for their supplies to you. I wondered if you would share with us what the current profile of that looks like.

No, Jay, we won't do that. Cabot corps is very important and critical supplier for us and we need to work very closely with them and our ability to give them the ability to see through in to our business is very important to them and to us and I don't think it's appropriate for us to share those forecasts.

The last question I have concerns the 130 nanometer copper slurry. Given the initial ramp up at the 90-nanometer node that's now going on, for just this portion of your copper slurry business, what do you anticipate will be the future profile of revenues?

Our practice has not been to give guidance or forecasts on revenue. What we would expect is that at 90-nanometer, the ramp was like a similar sort of rate as what we saw at 130 nanometer, perhaps a bit more accelerated. We think right now the commercial quantities of devices made at 90-nanometer technology are very small, a small part of the commercial business within the industry today, clearly that will ramp up. But we would expect a ramp similar to what was seen at 130, I think.

I was really wondering what the growth prospects were on 130 and when in the future that might flatten out.

Well, there is a second wave of customers, once you get past sort of the top 7or 8 customers that are active in 130 now, is being introduced now. We think there's continued growth at 130, even though that's, 90 is now becoming commercial. We would look for continued growth at 130.

OK, thank you.

Your next question comes from Jeff Cianci with UBS.

Hi guys, I know we can't project revenues, but I wondered first about operating expenses running about close to $20 million this quarter. Is that good for the balance of the year? Do we still see some creep-up in R&D? Seasonally what's going to happen there? Then I will lead you to my margin question.

OK. If you look, if you recall last quarter, we had R&D cost as bit higher, I think it was $1.7 million higher. At that time we said that was sort of a run rate you could expect for 2004, fiscal 2004 and we would still stand by that. We did see a downtick in R&D spending this quarter, but I would like to explain that a bit. Most of that reduction is based on R&D supplies including wafers, a big part of our development effort is polishing in our clean room, we used wafers purchased, test wafers in the developmental process.

We account for those, we expense those as we purchase and receive them and so last quarter clearly we had, because of the timing of those purchases, we had higher wafer expense that we didn't see this quarter. That's not the sort of thing that you would expect to persist. So I think our guidance last quarter is still sound. You have to look at sort of a 20 -- the level we had last quarter, the $20.4 million, I think something like that look at that going forward, with some modest increase. The other thing we cited last quarter, I would just remind you, is that with the Asia Pacific clean room and metrology facility we announced last quarter, you know, there will be some cost in the latter part of the year associated with that as that becomes operational. So there will be some modest growth in R&D.

OK, thanks. With the expense down, you would think then with the revenue ramp sequentially of about, looks like 8, $9 million, incremental profits, several million, it suggests that the manufacturing cost increase sequentially was several million dollars, you know, somewhere in the 3 to $5 million range. Just seems very high as an incremental manufacturing change. Can you maybe flesh out a little more what went up so much on the cost side?

Yes, if you recall, think back to the March call of 2003, fiscal 2003, and at that time we talked about increasing performance requirements of our customers. What we see is our customers raise the technology bar and products that have been performing and satisfactory to our customers in the past, you know, the requirements increase and so our requirements for higher quality, consistency, reproducibility increase as well.

And since the March quarter we said that yes, there could be times where that could reoccur and it did this quarter. And what that translated in to was lower yields in our manufacturing process as we need to tighten specs consistency requirements, quality requirements and that, additional warranty costs and additional freight costs to the extent that we need to expedite product to customers.

But that stays with us, all right.

I am sorry.

That stays with us, then, those higher costs stay with us for each sub sequential -

They tend to be sort of periodic or episodic.

Oh, I think.

And see you recall that in the March quarter when we had 2003, we had a margin of 48.9%. We had a recovery the next quarter to 51.2%. And so what we have guided in the past has been, you know, think in terms of a gross margin of 50%, plus or minus 2 and the minus 2 is to account for these kind of higher manufacturing cost that's we have seen in the past occasionally and which we are exposed to going forward.

OK. So you think more occasional and you are still comfortable then with a 48 to 52 picking the reversion to the mean, would you think maybe we would revert to the mean eventually in gross margin?

We think the 50 plus or minus 2 is still good guidance going forward.

OK. And then I don't take lot time but lastly, you didn't talk much about pads revenue potential. Did you say '05, fiscal '05 for more new pad business as opposed to reseller? Or is it some this year?

Yes the reseller, yes another -- the focus this year will continue to be through this value-added reseller approach. We'll be testing pads of our own technology later this calendar year.

OK. Thanks.

Sure, thank you.

You have a follow-up question from John Roberts with Buckingham Research.

Thank you. I think the press release, I don't have it with me, but I think it said, you had average selling prices up sequentially, but talked also about price pressure contributing to some of the gross margin compression here. Could you - may be clarify what actually is going on in price?

Yes, if you look at the average selling price increase, the 2.8%, there were three elements that caused that. One was just a richer, higher valued product mix. And that was the biggest factor. A smaller factor that was about half of that size was the foreign exchange benefit and then a factor that was sort of half the foreign exchange factor that was adverse was selected price reductions. But the price reductions were the smaller piece of it.

And then in the discussion on Tungsten you mentioned memory as an opportunity, I think it's been a long time since we have heard you talk about any opportunities in the memory side for either ILD or Tungsten. Could you maybe discuss what you meant there?

It was really with respect to -- there's talk of the cannibalization or adverse impact on Tungsten growth with the shift on logic devices to copper. But there's still should be growth opportunities in Tungsten in memory. And you've seen the last several quarters, our Tungsten business has been very strong, demonstrates strong growth. So that would be an area, that and the more leading edge devices on the logic side. But we have maintained attractive, excellent performance in the Tungsten business and we would see continued growth there too.

Is memory material on the business today? Or do you think it will become a material percentage? If we ask a couple quarters from now what percent of the business it was, it would be something would you want to track?

Well, broadly I guess we think that memory represents say 50 to 60% of wafer starts. And Headline News is always around copper and what's going on in copper, it was logic. But interesting things going on in memory and have developmental activities going on in each of the product areas, and some of that is directed at growth in memory.

I don't know whether my question got answered today. Memory today is not a material part of the product sales, but think maybe it might be in a year?

No, no, actually it is an important part of our product sales. Of course, not copper, but oxide Tungsten would be important parts of the memory business.

What percent of your sales would be memory related?

We have not disclosed that.

OK. Thank you.

Thank you.

You have a follow-up question from Jay Harris with Goldsmith Harris.

This will be the last question we will be able to take.

Bill, since you've been there, what can you tell us about any reorganization changes in people count, changes in emphasis on how the business will be operated going forward?

Sure, Jay thanks for the question, actually. Let me say a couple things, because that's a great question. First of all I would like to say I'm really happy to come back to something that I've had a tremendous amount of pride for the last four, five years of my life, and I think this is a great business and exciting place. You know, the people here in our position in the market in my opinion are second to none and it's just a wonderful opportunity for me.

You know, Jay, you know me, I'm a young guy, I'm 45 and I think I see a lot of runway here in this company. The changes I have made essentially, you know, when I was asked to come here, the changes I made is to sort of build my team and establish my team that I would like to work with going forward for as long as I'm here, which I hope is a long time.

So I have made some changes, the team that's in place today is my team, with the addition of the two positions I'm recruiting for, the one to replace Dan Pike and the one to replace Michael Jenkins. So those are the changes at my executive leadership team level. The second thing we have done is internally in the company we have re-aligned our people around the market applications and technologies we have served and continue to serve.

What we're trying to do here, Jay, is get much more focus and intensity around our customers and much more focus and intensity around the applications and the technologies which we play in. Along with that reorganization we are doing what I would describe. As we are trying to empower people where the work is done and put much more of the decision-making accountability and responsibility in the hands of the people that are close to our customers.

On another front, it's my opinion and our opinion that we need to move much more deliberately and extend our global footprint in to Asia and I think I spoke my comments and I started, we are going to place Dan (ph) there as another senior executive in the region and ask Dan to lead our charge with (inaudible) and really build our position in Asia and make sure we are the leaders in that part of the world as well.

You know, I come from a sort of a different industry, clearly on the other end of the spectrum from this one. I had forgotten how demanding the customers are in the semiconductor industry and the intense pressure to continuously improve on both reliability and quality. And that being said, you know, we spent a lot of time talking about the being way more focused and targeted on execution and delivering on results and I spent the bulk of my time on that issue.

So there's a lot going on. Again, I'm really excited about what I see, I'm excited about where the business is and, you know, I hope to talk to you man many, many more quarters, Jay and carry out what we are doing.

I gather from what you just said that there's no substantial change in people count, no do you anticipate any.

No. Well, if I anticipated any it would be additions, Jay.

OK, that's what I meant.

In fact, Jay, our head count went up from the September quarter to the December quarter, I think we're at around 550 in September and we added heads in December, kind of across the board, operations, R&D, sales and marketing, administrative. We added I think 12, 13 heads. So not a huge amount but we're going upward, not downward.

OK. Thank you very much.

All right thank you all for your time this morning and for your interest in Cabot Microelectronics. We look forward to speaking to you again soon.