CMC Materials, Inc. (CCMP) 2004 Q3 法說會逐字稿

Good morning. My name is Thea, and I will be the conference operator today. At this time I would like to welcome everyone to the Cabot Microelectronics 2004 3d fiscal quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question at that time you may press star, followed by the number 1 on your telephone keypad. If you would like to withdraw the question, you may press star, and the number 2 on your telephone keypad. Thank you. I will now turn the call over to Mr. David Lee, Director of Investor Relations. Sir, please go ahead.

Good morning. With me today are Bill Noglows, Chairman and CEO and Bill Johnson, Chief Financial Officer to host this earnings conference call for the 3rd quarter of fiscal 2004 which ended June 30th. This morning we reported results for our 3rd quarter of fiscal 2004 and also announced a share repurchase program. A copy of our press release is available in the Investor Relations section of our website at www.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 4 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 5676078. Playback will also be available via webcast for the next 4 weeks in the Investor Relations section of our website 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 factors that could cause actual results to differ materially from these forward-looking statements.

These risk factors are discussed in our SEC filings including our reports filed on form 10-K for the fiscal year ended September 30, 2003 and form 10-Q for the 2nd quarter of fiscal 2004 ended March 31, 2004. We assume no obligation to update any of this forward-looking information. I will now turn the call over to Bill Johnson who will review our financial and business performance. Bill Noglows will then discuss broader business issues. The formal comments will take about 25 minutes after which we will take your questions.

Thanks, Dave. Good morning. We are pleased with the financial performance of the company during the 3rd quarter of fiscal 2004. We reported record revenue this quarter of $76.9 million, up 4.6% sequentially from $73.5 million last quarter and up 19.7% from $64.3 million in the same period last year. Through the first 3 quarters of fiscal 2004, revenue of $226.7 million is 23.4% higher than the $183.8 million we reported for the first 3 quarters of fiscal 2003.

All product areas experienced sequential revenue increases this quarter except for our slurries used in data storage applications. On a geographic basis, sales in Asia-Pacific increased sequentially by 9% while sales in North America and Europe decreased by 2.6% and 3.2%, respectively. Our average selling price increased by 2% this quarter versus last, mainly due to a higher valued product mix, partially offset by the effect of some limited price reductions. Gross profit for the quarter was $39 million, up 7.9% versus the prior quarter's $36.1 million and up 18.5% from $32.9 million in the year-ago quarter.

This represented a gross profit margin of 50.7% of revenue this quarter compared to the 49.2% of revenue that we reported last quarter and 51.2% in the year-ago quarter. Gross profit this quarter benefited from a higher valued product mix and improved manufacturing capacity utilization based on the higher level of sales partially offset by the impact of selected price reductions. Operating expenses which include research and development, selling, marketing and general and administrative costs were $21.1 million this quarter, down slightly from the $21.3 million we recognized last quarter and $2.8 million higher than the comparable quarter last year.

Operating income for the quarter was $17.9 million, up 20.7% from $14.8 million in the prior quarter and up 22.1% from $14.6 million in the same quarter a year ago. Operating income represented 23.2% of revenue this quarter, which was up from the 20.1% of revenue that we reported last quarter and up from 22.8% in the year-ago quarter. Our effective income tax rate was 31.8% this quarter which is less than the 34% tax rate we reported for our first 2 fiscal quarters. This quarter we benefited from additional extra territorial income tax deductions related our [inaudible] sales. Based on an updated analysis of our tax position, our expected income tax rate for the 4th fiscal quarter and for the full year is 33.2%. Net income for the quarter was $12.2 million, up 26% from $9.7 million last quarter and up 25.4% from $9.8 million in the same quarter last year.

The weighted average number of shares outstanding on a diluted basis was 24.9 million this quarter, unchanged from the prior quarter. Diluted earnings per share for the quarter was 49 cents, up from both the 39 cents per share we reported last quarter and 40 cents in the year-ago quarter. Turning to cash and balance sheet related items. Our working capital decreased by $1.2 million or 2.8% this quarter primarily due to an increases in tax payable. Days of sales outstanding and accounts receivable decreased slightly and inventory increased marginally. Capital spending for the quarter was $2.8 million, as we made investments in our research and development, manufacturing, and IT areas. Depreciation and amortization expense was $4.5 million for the quarter.

Our full year forecast for capital spending remains at $17 million. Which includes our 4th fiscal quarter investment in NOW Products Corporation and our purchase of land adjacent to our plant in Gano, Japan. Our full year forecast for depreciation remains at $18 million. We ended the quarter with $155.9 million in cash. $15.6 million higher than last quarter. Total capital lease obligations were $8 million and we have no long-term debt outstanding. Let me now provide additional commentary on the performance of our slurry product areas beginning with copper.

Revenue from our slurries for polishing copper interconnects increased by 7.6% sequentially and represented 22.2% of our total revenue for the quarter, up slightly from the 21.6% we reported last quarter. We believe that we are currently the leading copper CMP slurry provider to 5 of the 6 technology-leading semiconductor manufacturers for 130-nanometer copper applications. However, we expect that after the end of fiscal 2004 our supply position will fall to 4 out of these 6 technology-leading firms as one technology leading customer is now transitioning to another slurry supplier for 130-nanometer technology that we believe offered an economic advantage in costs of ownership.

That customer remains an important customer to us in all other applications including advanced copper technology. For 90-nanometer technology which remains in the early stages of adoption we have been selected to supply 2 of of the 5 technology-leading semiconductor companies that we view as most advanced in development and commercialization of 90-nanometer technology for copper. We have previously reported that another 2 of these semiconductor manufacturers have initially selected 2 different slurry providers. It now appears that the 5th semiconductor company that we previously reported was still evaluating suppliers has now selected still another slurry provider.

By our count, among these 5 technology leading semiconductor manufacturers, at 90-nanometer technology, there are 4 different slurry suppliers for copper polishing. This makes our company the only one with multiple 90-nanometer processor record wins among these technology leading companies at this early stage. But as we discussed in the past, it also underscores the more customized nature of CMP solutions required for next generation devices.

This is the 3rd quarter over which we have monitored our copper slurry supply positions for 130 and 90-nanometer technologies against these sets of industry-leading players. However, the industry landscape is changing with more semiconductor companies adopting 130-nanometer copper technology and additional companies advancing their development of 90-nanometer copper technology. In order to more precisely describe our company's position within this evolving industry in the future we intend to convey our supply position in terms of total process of record wins that we have garnered.

On this basis our slurries for polishing copper are the process of record with 9 customers at 130-nanometer technology and 3 customers at 90-nanometer technology and we are in an evaluation with a number of others at the 90 and 65-nanometer nodes. Now, let me turn to our other slurry products. Revenue from tungsten and oxide CMP slurries taken together was up 3.8% sequentially. In tungsten we continue to hold a very strong position. We are confident in our technology leadership and our intellectual property position in tungsten slurry products. We are beginning to see some early success in our initiative to convert some traditional home brewers to our slurries. We have two innovative tungston slurry products in development for application at the 90, 65 and 45-nanometer nodes that we believe will offer improvements in defectivity, planarity and corrosion.

We expect to begin commercial sales of one of these new products to a customer later this quarter for a 90-nanometer flash memory application and a number of other customers are evaluating these new products. We continue to see a bright future for our innovative tungsten products through anticipated strong growth and memory devices, particularly flash as well as in the overall market. Next I would like to discuss our slurries for dieelectric applications. Although oxide slurries represent the more mature area of the CMP industry we continue to see opportunities to innovate in new product development and improve not only product performance but the cost of ownership of our products.

Our new oxide product has received positive initial feedback from customers and is scheduled for commercialization later this calendar year. We also continue to make progress with our new direct shallow trench isolation product for which we are the process of record with 2 customers for 90-nanometer applications and are in evaluations with a number of others. Revenue from our data storage business decreased by 6.5% sequentially as the data storage market experienced some softness in demand usually seen in the 2nd calendar quarter. We believe we are one of the leaders in serving this market segment and we continue our innovation in the area with 2 new products in commercial ramp with customers. This concludes my finance and business review. I will now turn the call over to Bill Noglows.

Thank you, Bill. As Bill Johnson mentioned, we are proud of our record level of revenue and our overall financial performance for the quarter. In focusing on the future this morning, I would like to discuss a number of important initiatives that Cabot Microelectronics is pursuing to enable our success over the longer term. These initiatives include future technology, our expansion plans in Asia, a new direction in our polishing pad efforts and our implementation of a share repurchase program. During last quarter's conference call I discussed the trend of greater fragmentation of technology which is requiring more specialized and customized CMP solutions for next generation applications.

We are seeing this most dramatically in 90-nanometer technology for polishing copper interconnects where for example, as Bill has already mentioned, there appear to be 4 different CMP slurry providers supplying 5 of the leading semiconductor manufacturers. This is in contrast to the more established copper applications with 130-nanometer technology where there seems to be more commonality across CMP solutions. We believe that this trend towards greater customization will continue into the 65 and 45-nanometer technologies and beyond. It will be critical to our future success that we fully leverage our expensive infrastructure and capabilities in research and development as well as look outside the company for new technologies.

Our intent is to speed our pace of development by bringing in enabling technologies and technological capabilities to maintain and enhance our technical leadership. One of this is our recently announced strategic alliance with Nano Products Corporation which is a technology leader in nano scale particles. Nano particles can be customized and highly engineered to deliver unique performance attributes. We believe that through collaboration with Nano Products Corporation, we may be able to develop a range of custom abrasive particles that will lead to more innovative and customized CMP solutions for our customers to meet the needs of their future generation products as well as for other fine finish polishing applications.

We are excited about our relationship with Nano Products Corporation with whom we have been collaborating on joint development activities since 2002. This new alliance formalizes and strengthens our prior relationship. In addition, in conjunction with this alliance we have attained a minority equity position in Nano Products Corporation for an investment of approximately $4 million. While we continue to rely on our traditional suppliers of abrasive particles for our existing products and for future products as well, next generation CMP slurries will benefit from our capability to work closely with Nano Products Corporation to customize abrasive particles for specific applications.

We believe we can gain this technical capability from Nano Products Corporation, other non-traditional particle suppliers, as well as working with our traditional particle suppliers. We will continue to look for other similar opportunities to access innovative technology in the future to supplement our strong, existing technical capabilities. The second major initiative that I would like to discuss is our current thinking on expansion in Asia. As semiconductor industry production and technology continue to shift to Asia it is important for Cabot Microelectronics to expand our position there. We currently have a very strong presence and brand in Asia. Our manufacturing plant in Gano, Japan produces more slurry volume than any of our other plants and is currently under expansion.

We have sales staff and CMP application engineers in Japan, Taiwan, Korea, Singapore and China as well as an analytical lab in Taiwan. We intend to further expand our footprint in Asia as the industry continues to expand there. Over time we expect this will include a research and development facility along with a polishing and metrology clean room as well as additional manufacturing capacity either at our existing site in Japan for which we have just purchased additional adjacent land or at a new site in another country within the region. A third business area on which I would like to provide an update is our polishing pad business. In polishing pads we have been participating as both as evaluated reseller of pads supplied by a 3rd party as well as through the development of pads of our own technology.

Our goal has been to co-develop pads and slurries in order to provide technically optimized CMP pad and slurry solutions to our customers. However, as we discussed during our earnings conference call last quarter, despite performance advantages that we believe were provided by the valuated reseller approach, we were disappointed in both the slow rate of adoption of the pad products as well as the outlook for margins available to us as a valuated reseller. In the past quarter, we determined that the valuated reseller element of our pad strategy cannot deliver an acceptable level of profitability. Therefore, during our 3rd fiscal quarter we terminated our distribution agreement with our 3rd-party supplier of pads, Freudenberg, and are now working with our customers to help them through this transition period.

We continue to develop pads with our own technology where we see greater potential value for our customers and our company. The 4rth major initiative I would like to discuss with you is the share repurchase program we announced in conjunction with today's earning announcement. Our Board of Directors has approved a $25 million share repurchase program in light of our company's strong cash flow and growing cash balance. We believe that beginning this modex program now is a prudent use of a portion of our increasing cash balance.

The share repurchase program represents an attractive and flexible means to manage earnings per share dilution associated with exercise of stock options and shares issued under our share repurchase plan and also to return cash to our shareholders. Given the strong financial model and cash generator that our company represents, we believe the share repurchase program is affordable even with the significant potential demands for cash that I have discussed which include research and development capability in Asia, the new manufacturing capacity in Asia, and accessing external technologies to supplement our internal technical development efforts as well as any other broader M& A activity. Now, I would like to offer a few concluding remarks before we open up the call for your questions.

You are aware that we do not provide guidance on revenue. But as we look at orders for our products during the first 3 weeks of July, we see business activity roughly on par with activity we saw in June which was the strongest sales month of our 3rd fiscal quarter. However, I would caution that the first 3 weeks of sales out of a quarter represent only a limited window on quarterly results. Last quarter we modified our guidance on gross margin to a level of 48% of sales plus or minus 2% which was down from our prior guidance of 50% of revenue plus or minus 2%. In our 3rd fiscal quarter we slightly exceeded the high end of our new guidance range with a gross margin of 50.7% of sales.

Notwithstanding this performance slightly above guidance we maintain our gross margin guidance at 48% plus or minus 2%, given the uncertainties and impact on our results of changes in sales volume, product mix, selling price and manufacturing costs. In closing, during the 3rd fiscal quarter our company delivered strong financial performance. But more importantly, we also have recently realized significant progress on several broad initiatives related to leveraging new technology, expanding in Asia and returning cash to our shareholders. We are excited about the progress we have made in these areas that we think are important to our long-term success. Through continued execution on these initiatives as well as in a wide range of other areas, we believe we are well positioned for the future in this competitive arena.

Operator, we will now open the call to questions.

At this time, I would like to remind everyone that if you would like to ask a question, you may press star, followed by the number one on your telephone keypad now. Again, if you would like to ask a question, you may press star, and the number one on your telephone keypad now. We will pause for just a moment to compile the Q&A roster. Your first question is from John Roberts with Buckingham Research.

Good morning, guys.

Good morning, John.

The loss of the customer at 130 copper has been rumored for some time but you said that the customer ranked a significant customer of advanced products. What did you mean by that?

What did we mean by that? John, we --

I assume it is not a 90-nanometer copper customer.

Well, in all the 5 leading semiconductor customers that we talk about and when we keep score, we are in development with essentially all of them at 90-nanometer, 65-nanometers and 45-nanometers. And I think that may answer your question. As well as we continue to innovate and develop products with all of them for ILB, tungsten, shallow translation, all product areas.

Okay.

So I think that is what we were alluding to in that comment, John.

And then secondly do we see the impact of that 130-nanometer copper phaseout in the quarter just reported? And could you quantify at least for us if you can what kind of headwind we might have to overcome here in the next couple of quarters?

Yea, John, it is Bill Johnson. We did see impact of this transition to the other supplier in Q3. It is hard to really say how much that impact was. The reduction with this one customer was obviously more than than offset by increases with other customers. We should see further impact in Q4 but I don't think I could really put a dollar amount against it.

But sort of linear so the impact in Q4 isn't going to be materially more in than the impact in the quarter just reported?

I'm not sure we have a whole lot of visibility around that. It will depend upon the pace of the transition by this customer. I think all I can say is that there will be some continuing effect in Q4 and possibly going forward.

Well, just you then -- I obviously don't want to name the customer on the call here but there was a customer that said they going to slow down production significantly coming out of the June quarter going into July and it sounds like you've had a pretty robust beginning of the quarter without -- in spite of that?

Yeah, I -- I just -- I don't think we can say -- give any more visibility around the specific customers that we may be talking about. There will be a transition down with this one customer for 130-nanometer. But like we saw this quarter, there was quite a bit of increase in some other areas given our 9 process of record wins in 130-nanometer copper now and sort of existing -- new capacity in 130 that appears to be coming online we would expect, you know, the transition will occur but we think there will be an offset with some other growth in other area.

Okay. Thanks. Great quarter.

Thank you.

Your next question is from Jeff Cianci with UBS.

Hi, guys. Congratulations on getting things back in the right direction here. Earnings appear to be driven in part by when you talk about the margin and that you are going to remain conservative, appears you've had some positive manufacturing variance. Could you segment qualitatively how much the margin improvement is through the better volumes coming through the plant? You know, manufacturing variance versus another factor? And therefore, you know, is price -- selected price reduction just quite small relative to this manufacturing variance? Is that what it is all about?

Yeah, if you look at the variances between the 49.2% of revenue that gross margin represented in our 2nd quarter versus the 50.7% in Q3, the three factors were higher capacity utilization based on the higher level of sales, the higher value product mix, and a partial offset based on the selected price reductions. In terms of magnitude of those three, the higher capacity utilization fact was roughly equal to the price reduction offset. And then the higher value product mix was the largest of those three and it was about twice the size of either the capacity utilization effect or the price reduction effect.

That's a great answer. Looking forward to watch for the, you know, do you talk about what your capacity utilization is? I know it is many different products. But is it kind of a rough number that we, you know, we are in the steep part of the profit curve and every additional dollar can have a high incremental margin to the bottom line?

If you look at our historical performance, you know, we are not a heavily fixed cost oriented business, we are not capital-intensive and so we don't see a whole lot of leverage around gross profit margin with volume but we do see some. Given the need to maintain, you know, a capacity cushion in order to respond to demand spikes from our customers, we maintain, you know, excess capacity on purpose. And that capacity kind of depends upon the product line and sort of the margin related to those products.

We are expanding our existing capacity in Japan to help maintain that sort of capacity cushion and that is an incremental capacity. We are adding a little bit of building space but just really basically equipment to help maintain that capacity cushion but I think with any -- until we would build the next standalone manufacturing facility there should be, you know, modest economies in gross profit margin with growing volume.

Yeah, okay. That is what I'm getting at is could you take this quarterly revenue up, I don't know, another 10 million without expanding capacity? Is there a product line we are bumping up against it right now? More copper? More tungsten?

The capacity cushion depends on the product line and it would depend on where that extra $10 million of revenue came. But we are always maintaining, you know, a certain capacity cushion because what we absolutely cannot do is not meet customer delivery requirements, obviously.

I think, Jeff, that there isn't as much leverage as you might assume if you compare to kind of a traditional chemical company with a lot of capital assets on the ground.

Right, I understand.

And the other side of it is, you know, we manage the business to never short a customer on CMP slurry supply so we try to maintain a buffer or a cushion of capacity in the system to make sure we don't do that. We have the advantage that we have 4 plants around the world that we can shift capacity through and manage that capacity buffer pretty efficiently and the guys on the manufacturing side on the business today are looking carefully at continuing to find those efficiencies and productivities.

Right, thank you. Then just a clarification on your buyback plan. I don't think you put a time frame on the stock buyback. I suppose you could be in the market as of next Tuesday. Do you plan to be aggressive then at these price levels?

Yeah, we didn't disclose any expectations for the pace of that program. It is an indefinite time period. It is a $25 million program and we did not put a time frame around it. But it will take -- we will make purchases in the market during our, you know, our open trading window periods over the future. You know, based on, you know, competing needs for cash and prudent financial management. But no particular time frame on that.

$25 million cash is a small part of what you have, but any qualitative comments on where you would like to buy the stock presumably at these prices?

No, I don't think we could comment on that.

Thank you very much.

Thanks, Jeff.

Your next question is from Suresh Balaraman of Think Equity.

Good morning, guys.

Good morning.

In terms of the loss of one of the 5 customers at 130-nanometers, is it something that affected your tungsten, oxide and copper or is it just copper or just part of copper?

Just part of copper.

Okay. And if I remember right, I mean excluding the distributors the largest customer that you ever had was in the $8 million to $9 million on a quarterly basis so I'm assuming it could not have been more than a few million dollars kind of impact. Is that the right math? Even if the worst case comes to it, it cannot be much more than that. Is it the way to think about it?

We have -- in the 10-K we disclose greater than 10% customers but haven't pointed out, you know, product lines for is customers. We do have some, you know, significant concentration of business with a few number of customers. And this -- the impact of this transition will occur -- well, it has begun occurring and it will occur over the next several quarters but I think we will have to see how that plays out along with additional growth we might see with other customers at 130 to see how visible that might be in terms of overall performance.

Okay. In terms of the number of days in the September quarter. I think there are a couple of days more and will that be an impact on your slurry volume? It is I think 3% higher than what it was in the last quarter.

If there are more business days, yeah, in the September quarter you might expect some impact there. I guess that is -- we haven't really focused on that if there are more numbers, more days than there could be more shipping days and therefore might be a benefit. I think that is probably maybe dwarfed by the broader supply and demand impacts within the industry.

Okay, great. And finally, there were any customers above 10% in the current quarter excluding distributors?

We only disclose that on an annual basis in our 10-K so it's not something that we would share at the quarter.

Okay, great. Thanks, guys.

Thanks, Suresh.

Your next question is from Ted Burke with Lehman Brothers.

Thanks a lot. I was wondering in terms of the capital spending plan, I don't know if you mentioned this already but what is the budget for 2005?

Ted, we are at this point in time we are not prepared to discuss that budget yet. It is coming together. We are in the middle of our planning process for the next fiscal year. We will disclose that number as soon as we it have it.

As I talked about in my comments, you know, we have aggressive plans to extend and expand our position in Asia which may include a manufacturing facility some where in the region, a new one separate from Gano. We also have the intention of extending our technical capability into the region with a new R&D facility which would include a cleaning room, a full metrology suite and CMP polishing tools. Those capital expenditures tend to run on the order of $15 million apiece. They can be more, they can be less but we are working those into our plans as we speak. So as soon as we get that number we will get it out there to people.

And you're on track for $17 million this year?

I think that is correct, yes.

Okay. And could you restate what CapEx and depreciation were in the June quarter?

CapEx was $2.8 million. And depreciation was $4.5 million.

Okay. So would it -- you had a couple of big CapEx years in the 2000 and 2001 where it was 35 and 2002, you know, 3 years at $40 million apiece. Is that the kind of range that, you know, potentially it may be in?

Ted, I -- yeah, potentially, yes. But, you know, let us wait until we give you a more concrete number that we can can rely on. This business tends to invest capital in, as I would describe it in slugs and it also tends to be bricks and mortar and as you know and have followed the company for a long time whenever we put down sort of a foundation somewhere in the world it costs us on the order of your numbers are correct, $30 million or $40 million but we are looking for ways to, you know, innovative and maybe more creative ways to get our position established or reenforce our position in Asia where maybe we can minimize some of that capital. So I don't want to give you a number today until we are more definitive on what we are going to spend and how we are going spend it.

Okay. Yea, I understand. On the cash level at 156 million in June, how much do you think you need to just operate the business on an ongoing basis and how much, you know, excess cash do you think you have? How did you come up with the $25 million buyback amount roughly?

I think going forward we're going to want a maintain a healthy cash balance. And I don't really have a sort of an optimal cash level to share with you but as we look forward, as we look at the cash generation the company has enjoyed over the past several years and we built it to like you say $156 million, I think we all realize we are generating cash in excess of our needs and so a share repurchase program was this size was appropriate. As you are seeing the CapEx going forward given the plans for expansion in Asia likely higher than what we have seen certainly this year and last year which will be, you know, additional demands for cash. I guess I would say we are kicking off the $25 million share repurchase program because we think it was appropriate given the CapEx plans going forward and our cash needs going forward. I think we'll just have to monitor that to see, you know, we can tweak it and adjust it based on our cash generation and cash needs.

Okay. And one last question, if I can. The comment you made on the revenue outlook. Was it that the first 3 weeks of July are in par with what you saw in the month of June and June was a monthly record for the company? That is for orders, I guess, the orders in the first 3 week.

Let me clarify. We were saying the first 3 weeks of July are on par with the first 3 weeks of June and June was the strongest month of the fiscal 3rd quarter.

Okay. Okay. Thanks a lot.

Your next question is from Jerry Flemming with WR Hambrecht.

Yes, great quarter, guys. At Semi Con West a couple of the CMP equipment suppliers were showing their 65-nanometer generation machines. And they -- they were multiple platen designs that included a unit that used an abrasive polishing liquid as well as conventional slurries and other platens. Do you have a feel for how much slurry usage is going to be required at 65-nanometers in this multiple step process compared to what is used at 90? And do you supply those abrasive free materials?

Jerry, we work with essentially all of the OEMs on next generation equipment technology. We are very familiar with what is out there and what is being experimented with and utilized at 65 and 45-nanometers. I -- I think our expectation is that utilization of slurry on those new tools will be less than the current set of tools that are in the market. That being said, they will continue to -- at least the OEMs that we are working with continue to use platens with slurry and polish and again we are working closely with all of them. Some of the solutions tend to be very unique and I would describe them as very technically sophisticated and so we are somewhat excited about the opportunity to work in the 65-nanometer and 45-nanometer nodes on some of the new tool platforms and again we work with all of them. And we think it is some exciting space for our company as well as for the technology.

Okay. And just one other factor and that is there is an interesting new machine out there in the CMP world from Nikon that is a very low downforce machine. Are you working with them as well?

As I said, I think we work with all of the OEMs. Both in an effort to ensure that our new products are in line with their technologies and do what we can to help them extend their technologies so I would just leave it that that we work with all the OEMs.

Okay. Thank you.

Your next question is from Ollie Irani with CIBC World Markets.

Good morning, gentlemen. I'm hoping you could help us understand. You know, long-term trends have been towards more layers of CMP process at 90-nanometer and obviously 130-nanometer as well and we all appreciate your candor and your transparency in talking about the design wins and design losses. I'm wondering to what extent you've done the calculation to say that the overall pie is growing enough that Cabot even with a lower rate of design wins would be able to maintain revenue growth and perhaps margin expansion? In particular I care about that revenue growth compound.

Ollie, thank you for the question. I think as Bill discussed when he led off his talk that, you know, we're up 23.4% in the first 9 months of our fiscal year versus the first 9 months of our last fiscal year and the industry data that we keep track of and we are by no means experts on industry data, but we look at the same sources you do, would tell us that wafer starts is a sub .25 micron are on the order of 23%. So we feel like we're tracking pretty consistently with wafer starts at the leading edge, if you will.

As we go forward, you know, we are -- we are as you know we are working hard to change our approach from what I would describe has been a mass market approach to CMP slurry development on the order of, you know, one slurry for all the customers we have rapidly changed and reorganized ourselves to begin to develop customized solutions for each of our leading edge customers and we feel confident that we have the capability and the scale and the expertise to do that better than any of our competitors can do. I'm not sure I'm answering the question you asked me. I think you're asking about our future ability to grow and extend our position and maintain our margins.

What I'm talking about is, you know, the pie would be -- the pie for CMP slurry volume would be getting larger on 130-nanometer and 90-nanometer going from the present 20-25% of total wafer starts up by a double over the next year and a half and so that would be the blanket opportunity and at even lower market share you should still be able to drive some degree of revenue growth. I guess what I'm trying to do is figure out what that revenue growth would be.

I think that is a good question. I think I would remind you that offset by that is the transition from 200 to 300 millimeter wafers, which is a bit of a drag on that growth picture as we see it. We continue to see more and more business, and what's interesting is we see more and more business at the 130-nanometer node both with existing customers and what I would describe as the second wave of customers that are moving into the 130-nanometer technology. But your question is a good one.

Great. Thank you very much.

All right.

Your next question is from Chris Cash with Fleck Diamond Research.

Just looking at the mix effect in your current quarter, just wondering if the -- if you're seeing, you know, a stronger ramp in revenues related to logic chip production versus memory chip production if that is an accurate way of categorizing the current trends and perhaps if you could comment and see the respective trajectories continuing into your 4th quarter or the 2nd half of calendar '04 in general?

Yea, thanks, Chris. If you look at our revenue trend historically over the last several quarters you do have to split by product line to understand that because we have seen stronger growth in the tungsten and oxide areas than we have in the copper area and we talked about in the last couple of quarters about the fact that we thought 130-nanometer copper technology -- or copper capacity by our customers was relatively tight and was running at full capacity and with some conservatism I think customers were adding capacity at 130 a little slower maybe than they had been in the future.

So we pointed out that we are having stronger revenue growth of our tungsten and oxide which are more oriented toward, you know, aluminum wiring and logic devices and memory and we have seen a robust growth in memory. If you look at the industry data going forward and look at forecast growth of devices, you know, microprocessors, I think over the next several years would tend to grow I think the industry data is at sort of 9-10% over the next several -- next several years.

Whereas the memory, particularly flash is forecast to grow much more robustly and tungsten and oxide continue to be important products in memory applications. So I think you are right that some of our recent performance in tungsten oxide have been due to the robust memory growth and based on the industry forecast it looks like that growth should continue. But further, it looks like there has been additional capacity that has been added at 130 and so we would expect to participate in some of that growth in copper as well.

And that is what I'm getting at. Did you see some of that in this quarter or is that something we will see in your fiscal 4rth quarter and going forward in the 2nd half of '04?

This quarter, copper, for example as a portion of our revenue was 22.2% which is essentially what it was last quarter. It was at 21.6% last quarter. Copper grew by 7.6%. Tungsten and oxide together grew by 3.8%. So we didn't see -- it wasn't as profound in this quarter maybe as we have seen in the past several quarters.

Okay. Some of that is still ahead it sounds like. I'm curious about the Freudberg relationship. Did you continue to sell the pads throughout the fiscal 3rd quarter or is the termination of those sales starting in the current quarter?

Part of the process to help our customers transition through this change has been we have sold through this quarter. We have inventory of pads and we continue to sell to a number of selected customers,.

Okay. When would you expect that you would no longer be selling those pads and give us a sense of order of magnitude with the margins on those existing sales pads is?

Both the revenue and margins are small relative to our overall business so in terms of an impact in the future quarters of that transition, I don't think there will be much that is visible.

Okay. And then I had a follow-up on the 90-nanometer copper discussion. What I'm hearing is there is significant integration challenges at 90-nanometers and I guess the fragmentation that you alluded to speaks to that. But I'm curious if those leading edge logicmakers at 90 that have said to pick their process of records I'm wondering if you still have a shot at gaining more than those two or if you get the sense that those are absolutely set in stone process of records?

I think in -- Chris, I think in the past we have shared with you our experience in new technologies and new technology nodes. We have talked about our previous experience at 130-nanometers where early on in the process of the ramping and qualification process there was many, many players and over a period of time it evolved down to 1 or 2. You know, we are kind of at same stage in the 90-nanometer technology I guess I decided we need to stop talking about waiting for someone else to fail and for us to step in.

I think, you know, these technologies are hugely challenging. And depending on the different integration schemes, the different tool sets, the different wafers, the different films that are on the wafers, it becomes more and more challenging and we, you know, we continue to be close to all of our customers. We continue to work with them at the next nodes as well as the existing nodes but I don't want to lead you believe that we sit here believing that, for instance, the 2 at 90 that or the ones at 90 that we have not won we will win in the future. While we would like to believe we can do that and we continue to focus all our efforts at doing that I don't want to lead you believe that, you know, we think that is going to happen so. Does that answer your question?

Yes. It sounds like conversations are still ongoing.

Always ongoing.

Right. The --

Chris, we need to go to the next questioner, I think.

Operator, I think we have time for two more questions.

Your next question is from Jay Harris with Goldsmith and Harris.

Good morning. Very good quarter, gentlemen.

Thank you, Jay.

Could you repeat your gross margin forecasts or a guidance going forward? I missed those.

It remains the same.

46-48.

48% of sales plus or minus 2%.

All right. 46-50. On your nano products acquisition, minority interest, is this going to be significant enough that you will be listing an equity and earnings line?

Yeah, we will going forward we will account for that on the equity method of accounting.

And I just wondered if -- we have talked about your business in terms of 190 -- I'm sorry, 90 and 130-nanometer nodes. Does it make sense to look at the business from the point of view of 200-millimeter wafers and 300-millimeter wafers and what percentage of your revenues currently are at the 300-millimeter wafer stage?

It may, Jay. Do I have those numbers in front of me right now? No, I do not.

Okay. Perhaps we could follow up later. Thank you.

Your next question is from Robert Tango with Lasard.

Hi, guys. Bill Noglows, just a strategic question. You in the discussion, you know, the last 2 quarters you talked about the fragmentation and what you're implying obviously is the required customization of product as we move to smaller feature sizes, 90, 65, et cetera. And you're making this investment in nano products.

There is obviously more and more smaller businesses that see the consumables industry as being attractive. So, I guess I had two questions just from a strategic standpoint. Does senior management team and the board see a lot of companies out there that they could potentially invest in or acquire or develop a relationship with that actually have expertise in particle manipulation which is really where, you know, your business was founded? Or are we still trying to figure out whether or not there are companies out there with some expertise in the manipulation of particles?

Rob, we -- let me address your question with two ways. First of all, as you know, our primary supplier of abrasive particles a Cabot Corporation. Cabot Corporation is one of the world's leaders in nano particle materials and has been making nano particles long before the whole nano particle hype came to be.

Right.

Tremendous amount of technical capability and experience and we are quite pleased at the involvement and the relationship with Cabot Corp as our supplier of abrasive particles. The nano products partnership relationship before we engaged in that relationship we screened over 30 different nano -- call them nano particle companies and determined that this company had some unique technology that we believed could help us given what we see in the future road maps for technology in the CMP space.

Okay.

We are always and continue to be looking for not only abrasive companies but other companies that we feel have unique technology that we could -- you know, we could tuck in, if you will and add in to our already, what I believe is extensive technical capability in an effort to make sure that we have the full set of tools in our toolbox to be capable and ready for the next generation of technologies. So to answer your question, I think the answer is is yes, we are always out there in the market looking for technologies. We are very, I guess fortunate to have the flexibility of a very strong balance sheet and we will continue to do that.

But do you see -- are we to the point yet I mean because the industry is is still maturing and still growing, are we to the point where you see, I guess, a worth while category of companies with some value-add expertise or are we still trying to feel out maybe some of these companies that are maybe a little more speculative? Because it's still very early in the process.

Rob, the arrangement with Nanoproducts is developmental. The thing that appeals to us about that company in particular is the flexibility to tailor products and we are in the very early stages of, you know, our strategic alliance with them but we are excited about what that could represent. It is for future technologies. Future generations.

I think strategically it makes a lot of sense. I'm trying to get a handle on the field of companies out there that you can view what sort of stages are with we at. Is there legitimate technology out there or are we still -- do we have to be delicate about who we approach and what kind of technology that we're look at?

I think if we are -- if you're speaking specifically about nano products technology and nano products companies, Rob, as you know, this are many, many companies out there that are nano something.

Right.

And we -- you know, nano products not only do they what what we think is unique and robust technology to engineer and customize particles, we believe they have a very strong intellectual property position in the nano space, which is important.

And do you think, Bill, just to wrap up the strategy question, do you think then that because of the changes that are taking place and requirements at 90, 65, 45 and the need to adapt quickly and more customized solution it is almost going to be a requirement for Cabot or anyone else in slurry to be successful to be able to have this, say an enhanced ability to manipulate particles very quickly or at a more rapid pace to adapt to the needs of all these customers' requirements?

I think it is important to have the ability to develop particles quickly. I also think it is important to be able to work carefully and closely with our suppliers to develop those particles of which I think we're very fortunate because we work very closely with our supplier Cabot Corporation I think as you know and nano products gives us the opportunity to work closely with them.

And then one last and thank you for your answer. Just one last question.

Rob, I think we are out of time.

Okay.

Thank you for your interest in our company. We look forward to speaking to you again.

Thank you for participating in today's Cabot Microelectronics conference call. This call will be available for replay beginning at 12 p.m. eastern time today through 11:59 p.m. eastern time on Thursday, August 12, 2004. The conference ID number for the replay is 5676078. Again, the conference ID number for the replay is 5676078. The number to dial for the replay is 1 (800) 642-1687. Or (706) 645-9291. Thank you for participating in today's conference. You may disconnect at this time.