CMC Materials, Inc. (CCMP) 2005 Q2 法說會逐字稿

[OPERATOR INSTRUCTIONS] At this time I would like to welcome everyone to the Cabot Microelectronics second quarter earnings call. Thank you. I would now like to turn the call over to David Li, Director of Investor Relations. Sir, you may begin.

Thanks. 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 second quarter of fiscal 2005, which ended March 31. This morning we reported results for our second quarter of fiscal 2005. A copy of our press release is available in the Investor Relations section of our website, 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 three weeks via telephone playback. The playback numbers are 800-642-1687, in the United States, or 706-645-9291 internationally, and you will need access code 3993332. Playback will also be available via Webcast for the next three weeks in the Investor Relations section of our website along with the 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 these forward-looking statements. These risk factors are discussed in our SEC filings including our report filed on Form 10-Q for the first quarter of fiscal 2005 ended December 31, 2004, and Form 10-K for the fiscal year ended September 30, 2004. We assume no obligation to update any of this forward-looking information. I'll now turn the call over to Bill Noglows.

Thanks, Dave. Good morning to all of you. This morning we announced disappointing financial results for our second quarter of fiscal 2005. We believe these results reflect a continuation of the difficult industry environment that we experienced during our first fiscal quarter. I will begin by sharing my thoughts on the current market environment, and then talk about my confidence in the strategic direction of our company since I believe that our financial results generally reflect current industry conditions rather than specific company issues. Bill Johnson will follow with a more detailed summary of our financial and business performance.

You will recall that during our first fiscal quarter which ended December 31 of 2004 we experienced a sharp sequential revenue reduction that we attributed primarily to a decrease in the production of certain semiconductor devices by a number of our customers, particularly the foundries. In an effort to correct an excess of finished goods inventory. Since demand for our products is primarily driven by wafer starts at subquarter micron technologies and since the foundries represent a very important part of our business this downturn adversely impacted sales of our slurry products during our first fiscal quarter particularly for tungsten and dielectric CMP applications.

During our second fiscal quarter we saw a continuation of this same industry environment which resulted in a much smaller revenue reduction but a reduction nevertheless. A number of industry experts have commented that the inventory correction appears to be near complete and they expect some recovery later this calendar year. As we look at our sales to date in the month of April we are beginning to see some encouraging signs. Through the first four weeks of April orders for our products are approximately 10% higher than the average orders for the comparable periods during the prior five months. The recent period during which we experienced the downturn. However, I would caution that the first four weeks of sales represent only a limited window on results for the full quarter.

Despite what we see as a current soft market environment for CMP slurries we believe that worldwide demand for electronic devices remains healthy and supports a positive outlook for semiconductors. For example, PC demand appears to remain strong particularly in notebook computers and although the communications sector has shown recent signs of slowing the demand for consumer devices including digital cameras, TVs, and personal media devices seems to remain robust. Notwithstanding our disappointing overall financial results for this quarter I believe that our business prospects are brighter now than they have been for some time. To this point let me highlight progress we have made two in specific areas. Our product development pipeline and progress on Six Sigma within our operations excellence initiative.

I believe that our product development pipeline is in better shape now than it has been in many years. Each quarter we try to update you on progress in new products in each application area. Given the length of the product development cycle and the qualification time with customers combined with our need to protect customer and competitive information it is sometimes difficult to demonstrate clear progress when we look at specific development-stage products only on a quarter by quarter basis. However, looking at the overall product development portfolio we are excited about how we have refilled our pipeline.

We have dynamic new product offerings in all of our major application areas. Bill Johnson will discuss this in more detail in a few minutes but in short in dielectrics we have two new products in or near commercialization and a third in early stage development that should offer significantly lower cost of ownership for our customers in our legacy products as either drop-in products with either comparable or better performance at lower cost or with a step change improvement in performance. Likewise, in tungsten, we have two new products at or near commercialization that demonstrate significantly improved performance that we believe will extend our clear leadership in this important application area. Finally, in copper, we have earned a process of record win for another 90-nanometer copper polishing application and we have also received our first commercial orders for slurries for copper and barrier polishing for 65-nanometer technology. We are excited about the prospects of all these new products.

Looking at technology more broadly, in the past we have talked about the fragmentation of CMP technology for the most advanced applications. Due to customers' varying needs which depend upon the specific materials and process integration schemes they utilize but developing a completely customized solution for every customer would be cost prohibitive given the significant resources and time required for new product development and meeting our customers' continual drive to lower cost. Instead our approach is to develop product platforms that can be tuned relatively easily for a particular customer's needs based on the films they use and their specific integration schemes. We are able to tune the slurries by dialing in the specific selectivity requirements for the films of interest by altering the respective amounts of a number of trace level chemical additives.

For example, last quarter we talked about tunable slurries that we are developing for advanced barrier polishing applications, which we tune by adjusting the various removal rates and selectivity of copper to the tantalum barrier and the underlying dielectric. Another example is for advanced dielectric applications where we can control the removal rates and the selectivity to oxide, nitride, and polysilicon. For advanced tungsten applications we can similarly adjust removal rates and selectivity to tungsten, nitride, and oxide. We believe that this product platform development approach with removal rate and selectivity control represents a very cost effective means of providing very -- providing highly customized value added solutions for our customers for the most advanced applications.

As we look across the competitive arena of CMP slurries we believe that no other company comes close to demonstrating this technology capability that we do across the application spectrum. Our revitalized product pipeline including our range of tunable slurries is evidence of that. And our new Asia Pacific technology center, which is scheduled to become operational in October of this year, will provide us with even greater global reach for our technology.

Beyond new product technology I would like to briefly address progress on achieving operations excellence through our Six Sigma initiative. For our first quarter we reported gross margin performance at 50.1% of revenue slightly above the top end of our guidance range and we discussed the associated improved product yields in our manufacturing process which at the time we cautiously attributed to the early benefits of our Six Sigma initiative. As you know we have broadly introduced Six Sigma across our company and several of our first-round Six Sigma projects have addressed reduced variability and improved quality in our production operations.

Although our gross margin performance for the second fiscal quarter was weaker than in our first I am pleased that with respect to quality and manufacturing yield, in our second fiscal quarter we improved upon our solid first quarter results. This improvement in yield was masked by larger adverse effects that Bill Johnson will discuss further. Our high yields this quarter are further evidence of progress on our Six Sigma initiative and we are optimistic that there are additional improvements that we can continue to capture in our manufacturing operations as well in all other business areas.

Further to this point although our gross margin for this quarter was at the lower end of our guidance range of 48% of revenue plus or minus 2% our guidance remains unchanged. We expect the competitive pricing environment that we have discussed in the past will continue, but our future of success at improving productivity through Six Sigma along with continual introduction of new higher margin products will enable us to maintain gross margin within this guidance range. Let me now turn the call over to Bill Johnson for a more detailed review of our financial and business performance. After which we will open the call for your questions. I will then make some closing comments.

Thanks, Bill. Good morning. Our revenue for the second quarter of fiscal 2005 was $64.5 million, which was down 3.8% sequentially from the $67.1 million of revenue we reported last quarter and down 12.3% from $73.5 million in the same period last year. As Bill discussed we believe this sequential decline reflects continued softness in the semiconductor industry that we reported last quarter.

This quarter saw combined revenues for our tungsten and dielectric slurries decrease by 5.2%. Slurries for copper polishing applications increased by 2% and data storage slurries decreased by 6.2%. Our average selling price for the quarter decreased by 1.1% compared to last quarter primarily due to selected price reductions. Gross profit for the quarter was $29.8 million, down 11.4% versus the prior quarter's $33.6 million and down 17.6% from $36.1 million in the year-ago quarter. Our gross profit expressed as a percentage of revenue was 46.2%, down from both the 50.1% of revenue that we reported last quarter and 49.2% in the year-ago quarter. And as Bill mentioned, at the low end of our guidance range of 48% of revenue plus or minus 2%.

Gross margin as a percentage of revenue was adversely impacted by a lower valued product mix, lower utilization of our manufacturing capacity, and the impact of selected price reductions. Of these three factors the lower valued product mix had the most profound effect, accounting for nearly two-thirds of the overall sequential variance. As we've discussed in the past our three primary CMP applications, copper, tungsten, and dielectrics have differing pricing and margin dynamics. However, despite the overall reduction in gross margin, as Bill mentioned earlier, we continued to benefit this quarter from yield improvements in our manufacturing operations that we reported last quarter.

Now let me turn to operating expenses which include research and development, selling and marketing, and general and administrative costs. Operating expenses totaled $21.4 million this quarter up by 10.5% from the $19.4 million we reported last quarter. And approximately $100,000, or 0.3% higher than in the comparable quarter last year. This quarter's higher operating costs reflect higher costs of clean room materials and laboratory supplies for our research and development activities, higher professional fees including fees associated with meeting the requirements of Sarbanes-Oxley Section 404, and higher staffing costs. Although up sequentially our spending on operating costs this quarter is in line with our pattern of operating costs over the last seven quarters reflecting continued careful management of costs in this area. We expect a similar level of operating costs in our third fiscal quarter.

Operating income for the quarter was $8.4 million, down 41.3% from $14.2 million in the prior quarter and down 43.6% from $14.8 million in the same quarter a year ago. Operating income represented 13% of revenue this quarter, down from the 21.2% of revenue that we reported last quarter and down from 20.1% in the year-ago quarter. Our effective income tax rate was 31.3% this quarter and we expect our tax rate for the full fiscal year to be 32.5%. Net income for the quarter was $6.1 million, down 38.4% from $9.8 million last quarter and down 37.7% from $9.7 million in the same quarter last year. The weighted average number of shares outstanding on a diluted basis was 24.7 million shares this quarter slightly lower than in the prior quarter. Purchases of approximately 148,000 shares of stock for roughly $4.8 million under our share repurchase program this quarter more than offset issuance of new shares due to exercise of approximately 125,000 stock options related to our April 2000 IPO which were due to expire this month. As well as employee stock purchases under our employee stock purchase plan. Diluted earnings per share for the quarter was $0.25, down from both the $0.40 per share we reported last quarter and $0.39 in the year-ago quarter.

Next I will address cash and balance sheet-related items. Capital spending for the quarter was $6.4 million mainly related to new equipment for our polishing cleanroom and metrology facility as well as construction of our new Asia Pacific technology center. We also made capital investments to expand manufacturing capacity mainly for new products and to support our quality efforts. Depreciation and amortization expense was $4.9 million for the quarter. Our full-year forecast for capital investments remains unchanged at $33 million and we expect depreciation and amortization for the full fiscal year 2005 to be $19.6 million. We ended the quarter with $163.7 million in cash and short-term investments, $6.1 million lower than last quarter.

Our days of sales outstanding or DSOs in accounts receivable as well as days of sales in inventory remained even with last quarter. However, cash flow this quarter reflects an $8.9 million increase in working capital primarily related to a reduction in payables associated with the specific timing of payments to a key raw materials supplier in the ordinary course of our business. And the timing as well as the statutory calculation method required for payment of estimated federal income taxes. Our cash flow also reflects the $4.8 million of share repurchases that I mentioned earlier. Total capital lease obligations were $7 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 copper polishing applications including barrier increased by 2% sequentially but was down by 7.1% compared to the year-ago quarter. Copper revenue represented 22.8% of our total revenue for the quarter up from the 21.5% we reported last quarter. We believe that we continue to have a solid position in copper slurries for 130-nanometer technology which remains the dominant node for copper polishing and believe we have not experienced any material change in our competitive position at this node this quarter. We expect continued growth in 130-nanometer technology into calendar year 2006.

Industry adoption of 90-nanometer technology for logic applications continues to progress. We hold five PORs for 90-nanometer copper polishing up from the four PORs we report last quarter and we hold two PORs for barrier polishing for 90-nanometer technology unchanged from what we reported last quarter. In addition we recently reached agreement with one important customer on a multiyear exclusive arrangement to supply copper slurries for 130 through 90-nanometer technologies. We also continue to work with a number of other customers as they prepare to adopt this new and demanding technology.

Beyond 130 and 90-nanometer technologies we're working with several customers on solutions for polishing copper and barrier using 65-nanometer technology. We have two 65-nanometer process of record wins for copper polishing both in conjunction with planned ECMP applications unchanged from last quarter. We also have one POR for 65-nanometer barrier polishing down from two PORs we reported last quarter. Since 65-nanometer technology is only in the very early stages of adoption we're not surprised that there may be some near-term fluidity with respect to PORs at this node. As Bill mentioned we recently received our first commercial order for products for polishing 65-nanometer copper and barrier.

Now let me turn to our other slurry products. Revenue from our tungsten and dielectric CMP slurries taken together was down 5.2% sequentially, and down 15.5% compared to the year-ago quarter. We believe we continue to have a strong technology position in slurries for tungsten applications both with our existing products as well as with new products in development. Our new 6,000 series product is now ready for commercial sale for 90-nanometer applications to supplement our existing offerings. And our new 7,000 series products still in development is being broadly sampled for use with 65-nanometer technology. We expect this product will also be extendable to 45-nanometers.

Given the strength of our existing products and the customer pull we are experiencing in our new products we continue to have confidence in our technology leadership in tungsten slurries. Further, we see a promising future for these products especially given the growth outlook that we see for memory devices. For dielectric polishing applications our new 6,000 series CMP slurry is now being commercially launched after extensive customer evaluation. It was formally introduced at an industry event yesterday under the Ideal trade name. This product provides improved effectivity but more important a lower cost of ownership than our legacy products. And it has received positive feedback from customers. We expect to commercialize our new 8,000 series product which is still in development and targeted for advanced ILD applications during the second half of the calendar year. Finally, sales of our slurries for direct shallow trench isolation applications continue with our customers' ramp of 90-nanometer technology where we are the process of record with two customers and are in evaluations with a number of others. Revenue from our data storage business decreased by 6.2% sequentially following two quarters of strong growth. This concludes our financial and business review.

Now let me offer some comments on share-based compensation expense as well as our near-term outlook. Last quarter we discussed the anticipated impact on our company of the recent FASB pronouncement on share-based compensation expense. FAS 123R, under which we will begin recognizing on our income statement expense related primarily to awards of stock options which have previously been disclosed on a pro forma basis in the footnotes to our financial statements.

Last quarter we discussed our expected pretax share-based compensation expense of $11 million for each of our fourth fiscal quarter of 2005 and for our full fiscal year 2006 based on the expected timing of implementation of FAS 123R. However, a recent SEC decision now delays the implementation of FAS 123R until our first quarter of fiscal 2006 so we no longer expect to recognize the $11 million pretax share-based compensation expense that we previously estimated for our fiscal fourth quarter of 2005. However, we still expect approximately $11 million of pretax share-based compensation expense for our full fiscal year 2006. We intend to monitor the regulatory landscape for any further implementation issues and will provide periodic updates as appropriate.

You are aware that we do not provide guidance on revenue but as we discussed earlier looking at business activity through the month to date in April orders for our products are approximately 10% higher than average orders for the comparable periods during the prior five months, the recent period during which we experienced the downturn. However, again, I would caution that the first four weeks of sales out of a quarter represent a limited window on quarterly results. With respect to guidance on gross margin as we discussed our guidance remains unchanged at 48% of revenue plus or minus 2%. Now let's open the call to questions after which Bill Noglows will close the call with a few final comments.

Operator we'll now take questions.

[OPERATOR INSTRUCTIONS] Your first question comes from Jerry Fleming.

Yes. Bill could, you give us the number of the amount of the buyback authorization that's still open?

We have total about I think $16.5 million, so there's still around $8 million left.

Okay. And also on the volume order at 65-nanometers, you mentioned in the last part of the call that the customer is using your slurries both for copper and for barrier. Is he using a two or three-step process, and is there an abrasive-free step?

The customer is employing the 65-nanometer -- this is Bill Noglows, I'm sorry. The customer is employing the ECMP technology at this node. So the first step is an ECMP step. The following two steps are conventional CMP steps.

Okay. Then you gave us your process of record over a lot of different areas. As you look at your competitors have they picked up any additional PORs?

I think you'd have to hear that from our competitors. We think we're happy with our progress in a number of areas but I think we would not be in a position to report accurately on what our competitors are doing.

Anything qualitatively?

Specifically around copper as you know, the copper market is very competitive and it's our intent to maintain our current position and capture new business in this important application area. In some cases Jerry, this might mean that we will be more aggressively pricing our legacy products to defend and recapture business but also, and most importantly it means that our developments and introductions of new products that we think meet or exceed our customers' performance expectations while providing them with lower costs is what's critical here and we're feeling -- I think I mentioned this morning that our product pipeline is in great shape and getting stronger, including copper and we're really excited about the opportunities we see. I think as we talked about our POR positions this morning we commented that 130 remained unchanged this quarter at eight, and we did not update during our formal comments in that we feel 130 has now become fully commercial for most customers and how revenue is probably a more meaningful way to talk about our position in this area. We will continue to provide our POR positions at both 90 and 65 since we consider these to continue to be emerging technologies and providing, we believe providing POR status is a more accurate representation of our position. I don't know if that answers your question.

Yes, it does. Thank you.

Thanks, Jerry.

Your next question comes from Dmitry Silversteyn.

Good morning, gentlemen. Couple of questions. First of all, when you talk about the 6,000 Series of product for the dielectric market you talked about that having better functionality but also being lower priced. Is it also going to be lower margin or are your margins actually going to improve in that -- with that introduction?

That's an important product we think in that it will be a drop-in for our existing product and represent comparable if not better performance but lower cost of ownership so it should represent a benefit to our customers in terms of lower price but because of the formulation of that product we think it will have an attractive margin for us as well. This is consistent with how we've talked about gross margin in the past that even though there's a competitive pricing environment and we expect continued pricing pressure by virtue of the benefits we think we can continue to capture and operational productivity as well as introducing newer higher margin products that's how we will maintain gross margin within our guidance so we expect an attractive margin on that new ILD product.

If you look at the relative performance year-over-year between copper and tungsten and dielectric, the copper revenue declined significantly less than the dielectric and tungsten revenues probably accounting for your poor mix on the gross margin line. But my question is with customer loss that you sustained in copper which you had to overcome to post these types of numbers why did the tungsten dielectric market -- or tungsten dielectric revenues for you decline so much? Was it something market specific in terms of types of chips that were produced in this quarter versus a year ago?

We think it's a continuation of the environment that we talked about last quarter. You remember we had a conversation during the last quarter conference call about how we were seeing excess inventories of some semiconductor devices in a number of our customers. They tend to be more isolated around the foundries and we hypothesized at that time that those were more legacy analog devices that were heavily -- more heavy users of dielectric and tungsten products as opposed to newer technologies in logic devices that would use copper. So we saw the same thing last quarter where we had some company-specific issues around our copper revenue -- I'm talking about our first fiscal quarter -- where copper revenue was down quite a bit due to company-specific issues that we don't see this quarter but in the first fiscal quarter recall that dielectric and tungsten were down quite a bit more. Now this quarter, our second fiscal quarter, we saw some growth in copper, we saw the absence of these two company-specific issues that we talked about during our first fiscal quarter and we saw a continuation of the softness, again, I think mainly from the foundries and you're seeing that in their announcements as well that it's impacting devices that utilize our tungsten and oxide slurries more heavily than copper. So I think it's a continuation of the same industry environment that we talked about in our first fiscal quarter with respect to tungsten and dielectric.

Fair enough. Final question, if I may, you didn't provide the top-line guidance, which is normal, you provided a little bit of a -- or reiterated your gross margin guidance. Did I miss or did you talk about the SG&A guidance for the third quarter?

I did mention that we expected for our third fiscal quarter operating expenses to be at par with our operating expenses for our second fiscal quarter.

So basically flat on a year-over-year basis?

Flat sequentially.

Okay.

As opposed to flat year-over-year.

That may be flat year-over-year but I was making reference to flat sequentially.

Fair enough. Thank you.

Your next question comes from Suresh Balaraman.

Thanks. In terms of the sequential decline in tungsten and dielectrics that you talked about are you able to segment it based on whether it's DRAM related or is it logic related that would account for the difference? And I have a follow-up after that. Thanks.

As I mentioned, Suresh, we think it's a different behavior in the logic market which uses copper CMP slurries versus older logic devices and memory that use tungsten and ILD. So we saw a growth in our copper business at 2%. Admittedly not a great deal of growth but we did see some growth there versus continued turndown on the dielectric and tungsten side. We think it is on the dielectric and tungsten side it's a continuation of the environment that we talked about for our first fiscal quarter. Again, you're seeing that in the kind of results of a number of the foundries that have just reported. You're aware that the foundries represent a significant part of our business so we are impacted by their business.

Suresh this is Bill. I would just add that we believe we've had no losses in our tungsten and ILD business this quarter.

Coming back to the same issue, the 10% increase that you are seeing in April is it driven by the bounce-back in dielectric and tungsten revenues?

I don't think we have a lot of visibility yet on the individual product lines and we're cautious about even providing that much visibility into April since it's so early in the process. But we are encouraged by what appears to be an increase in orders at least in this month.

Okay. On the 65-nanometer application with ECMP that you talked about can you give us a sense of how slurry usage on step changes, and the number of polishing steps change compared to a typical 90-nanometer application without the ECMP process? Thanks.

Suresh, kind of at the highest level of the ECMP tool it's sort of a third, a third, a third, in terms of if you were to compare with it conventional ECMP process it would be a third, a third, a third, you take out one-third of the CMP slurries on the ECMP tool and replace it with a more common electrolyte kind of chemistry.

As you do that what we feel like you're replacing the more commoditized portion of the copper polish. The second step which some folks call a soft landing in the barrier is where we think there's a lot more value dash added and will continue to be more value-added going forward.

Thanks, guys.

Your next question comes from Ali Irani.

Good morning, Ali.

Why don't we move on to the next question, operator. Your next question comes from Jay Harris.

Good morning.

Good morning, Jay.

Can you put this 1.1% selling price erosion in the March quarter into some historical context? For instance, what were your price erosions on a similar basis in '03 and '04 fiscal years, and how much of the price erosion do you sense was offset by Six Sigma in terms of the impact on gross margin?

My recollection is that we've -- the last March quarter we had a pretty significant erosion in ASP sequentially. I believe it was around 5%. At that time, we commented that the first quarter of the calendar year tended to be a time when we experienced greater pricing pressure and so we are pleased that we had much smaller ASP erosion this quarter, 1.1%. Of the 5% that we talked about in the March quarter of last year, around half of that was actually related to price reductions. I believe I recall that the rest was related to product mix and foreign exchange effects but to put that in perspective then you might compare our 1.1% ASP erosion this quarter to around a 2.5% erosion the prior quarter. I think in the prior year, fiscal 2003, in the March quarter we also experienced similar erosion in ASP related to price reductions and my recollection it was on the order of a couple of percent. So this is less than what we've seen in the preceding two years of the March quarter.

And how about offsets from Six Sigma?

The way I would characterize in terms of gross margin for example I mentioned that the product mix effect was responsible for about two-thirds of the overall -- I think it was a 3.9% reduction in gross margin as a percentage of revenue. The price reduction element of that was relatively modest and was approximately offset by the benefits of the higher yields. Those are on the same ballpark.

Okay. Could we talk a little about 65-nanometer activity? When on a time scale would we expect the wafer starts for 65-nanometer activity to be equivalent to the current level of wafer starts for 90-nanometer?

Jay, I think we're probably two years out on 65-nanometer technology to reach a significant number of wafer starts.

Then on SG&A -- I'm sorry, G&A, what was the reason for the sequential buildup there?

There's no single large item, but the kind of things we saw were larger professional fees and a noticeable element of that were professional fees associated with achieving compliance with Sarbanes-Oxley Section 404. We also had on the R&D side sequentially higher materials for our R&D activities. And a significant element of our cost in R&D are wafers for our clean room and we expense these as we buy them. In the past we've had some kind of erratic behavior of some of those costs based on timing of purchases. What I would say is last quarter's SG&A -- ST&A, including R&D, at 19.4 million, was a little bit abnormally low. 21.4 kind of represents sort of a recovery of that. As I mentioned earlier we'd expect a similar number in our third fiscal quarter.

Thank you.

Thank you.

Your next question comes from Ali Irani.

Bill, can you hear me now?

Hi, Ali. How are you.

Great. I can hear you. I'm hoping you could give me some more color on the negative mix in the quarter. Your copper business grew sequentially and typically that's been your best margin business so I'm just trying to understand how mix was negative. Is it a customer account by account situation? Is it a product mix within each individual segment? If you could highlight that for us please.

Ali, it's Bill Johnson. The mix is sort of on two levels. One it's application. The pricing and margin differ by copper, ILD -- or dielectric and tungsten, and also at a customer level. You could understand that a particular customer for one application that buys a small quantity might have a different price than someone who is a high volume customer. So there are two elements of mix, customer mix as well as application mix. In disclosure we lumped together our tungsten and dielectric business but you can understand that depending on how all three of those applications behave that could drive mix. This time we saw some limited increase in copper, overall tungsten and dielectric were down but within tungsten and dielectric combined those two products behaved a little bit differently.

Okay. I'm also hoping you could give us some color on the 90-nanometer and 65-nanometer. We obviously appreciate the color that you have by giving us some of the count, but given that we now have pretty significant number of chip makers moving to 90-nanometer ramp and even looking at 65-nanometer production what is the level of process of record wins that you would satisfy yourself to believe that market share trends have stabilized and both of the 90 or 65-nanometer and do you think that with some of these new products you actually have a shot at gaining back some 90-nanometer accounts?

Ali, Bill Noglows. How are you? Of course we would like to win all the business for 90 and 65-nanometer copper. I think what I said earlier is our approach today is to be far more aggressive on what I would describe as our legacy products to defend our current position and recapture business where we can. We are really excited about the products that we've added to our pipeline for copper and as I discussed the tunability and the ability to customize for specific films, specific materials, and specific integration schemes, and CMP tools is gaining traction and we're getting as I said we're getting very excited about the opportunities we see. Our work at 65, most of it I would describe as precommercial and heavy in the R&D, but again, we're very excited by -- as we talked in our script, we've received our first commercial order for 65-nanometer technology and we work with all of those companies today that are investigating 65-nanometer technology and beyond.

Okay. Looking at the gross margins when you assess the more aggressive strategy on pricing on legacy products you just hit a quarter where you have the lowest gross margins, when I look back to 1997, this was the worst quarter. When you look at the outlook ahead, I appreciate the comments about the 48% guidance but should we be taking a more conservative stance on the margin structure of the business over the next several quarters meaning are we trending more towards the low end of that range than the high end of that range, and if not what's going to get us back to the high end of that range?

The guidance is for 48% plus or minus 2. I think if you look at our last two quarters you've seen us at either end of that spectrum. First fiscal quarter at 50.1%, slightly higher than the top end, then now at 46.2, near the bottom end. If I look at those two quarters the biggest single factor driving that was product mix, and I think that's an uncertainty we'll live with going forward. But we have continued our efforts in improving operational productivity improvements I think we'll continue to capture benefits there. We believe that pricing will continue to be competitive but I would also like to continue to emphasize that our new products are designed for more cost of ownership for our customers but also attractive margins for us. In the past we've continued to bring out new products with higher margin and our expectation is we'll continue to do that and that's how we will maintain margins within our guidance of 48% plus or minus 2 but I wouldn't want to guide within that range. The 48% plus or minus 2 is our guidance.

Bill, when you look at those new products when do you see the favorable mix shifts start to have any meaningful impact to your overall business?

I guess that's a general question about all of our new products.

The higher margin ones.

Well, let me try to break it up a little bit. I think in tungsten where we believe we hold a very strong leadership position, we believe our new products will strengthen and build on that position in the future. For instance, we know of only a few alternatives out there which are targeted sort of niche polishing applications and do not offer this same level of performance and cost of ownership that our current products do and our future products are just an extension on that enhanced performance at lower cost of ownership. The same is true in the new products we talked about for ILD, and as Bill mentioned we formally introduced the products under the trade name Ideal yesterday at an industry event we had in North America. So I would guess that we would start to see meaningful commercial sales towards the end of the year, start of next fiscal year. I guess I looked at Bill to maybe follow on to that.

I think it differs by product. In the case of our newest dielectric product which is the drop-in the impact would be, depend upon how quickly existing customers trade out the legacy products for the newer product. I think we'll just have to see how that unfolds but we think there is -- there are attractive margins in these new products and we'll continue to report as we go along.

Great.

Move on to the next question. We've got a few.

Thanks, Ali.

Your next question comes from Harris Kapsh.

Hi, it's Chris Kapsh, Black Diamond Research. I had a follow-up on the 90-nanometer discussion. Is it accurate to say that most if not all of the logic producers deploy three steps for copper CMP, obviously bulk removal, soft landing, and then the barrier layer. Is that accurate? Then of the five process of records that you mentioned you had at 90 for copper removal are any of those for the soft landing step or basically all five of those for bulk removal?

Chris, Bill Noglows. The assumption that all of the customers or all the semiconductor manufacturers that are manufacturing devices at 90-nanometer technology use a three-step process is not correct. Some use a two-step process, some use a three-step process. Your second question, Chris, could you repeat it?

Well of, the five process of records that you mentioned you had at 90 I'm curious if those are mostly skewed towards the bulk removal or do you have some soft landing in there as well, or process of records.

Our technology and our I think Bill commented earlier that we believe the value added steps in the copper CMP process at sub 130-nanometer technology is in the soft landing and the barrier step. The bulk removal step has become -- Bill used the word commoditized, but it has turned into sort of the industrial step of the three-step CMP process. I'm going to ask Bill to quantify the question on the PORs.

Of the five we have at 90 we haven't discussed whether those were for bulk or soft landing or what the mix was but I'd just reinforce Bill's point. Our approach is to focus on the higher value segments and that's where we think the future value is.

So the tunability that you talk about in your copper products that is applicable to your process of records to some extent at 90-nanometers?

Not totally. Some of the products we have at 90-nanometers I would describe as our legacy products. We have a mixture of both our legacy products and some of the newly developed products that we talked about in our script.

But as you look forward the real challenge of copper in the future is that the copper barrier and the dielectric interface so that second, the soft landing and barrier and those material interfaces that's where the future value is going to be captured and that's where we think our tunable slurries will have an advantage in the future technology nodes.

Thanks a lot.

Thank you Chris.

Your next question comes from Robert Tango.

Thank you. Good morning. Bill Johnson, just one quick financial question. Some of the costs during the quarter that you talked about related to purchasing the clean room materials, the wafers, some of the professional fees, then obviously the Sarbanes-Oxley fees. Even though you guided to somewhat flattish overall OpEx, were some of these expenses incurred during the quarter more or less one-time, or -- I guess I was just a little confused by maybe your OpEx guidance in that, and maybe it's a function of ramping up R&D a little to keep that at healthy pace, but some of these costs during the quarter, I got the impression were maybe, as a result of some one-time things you had to take care of, but they seemed to be extending into the next quarter and I'm just wondering if we should expect the current level in dollar terms of OpEx to be consistent for the -- not only just in June but maybe into September as well.

The guidance we gave at that time beginning of the fiscal year was for operating costs, STA costs, as we call them, in fiscal 2005 to be only modestly higher than in 2004, and that's proven to be accurate. If I look at the STA costs of $21.4 million this quarter, there is some lumpiness in our STA costs, mostly around the materials for laboratories and clean room. The wafers and commercialization materials, things like that. Because they're expensed when you buy them.

Sure.

And that's the thing that has driven some lumpiness. And you'd expect that to be a little saw-toothed going forward. There's also some staffing related costs and sometimes those costs are front end loaded because you may have relocation or recruiting fees or what have you and I think we saw an uptick in that this quarter so we feel like as we look at the next quarter we should be roughly on par with where we are now.

Operator we've got time for two more questions.

Your next question comes from Steve O'Rourke.

Just a follow-up. You talk about being far more aggressive on legacy products. One, how do you define legacy products, and with more aggressive legacy product pricing is this with existing or just the new products that you're going to introduce?

When I describe legacy products I talk about the products that we currently have in the commercialization with a number of our customers. In the last couple of quarters we have talked about multiyear agreements with several customers and in those agreements we offered things like price ramps over some period of time. And the customers that have chosen to do business with us on that basis see, -- they value our supply chain, they value our quality, they value our products. And they're more than willing to engage in a relationship with us for a longer term. And those agreements are fairly unique in the industry and we're quite happy to engage in them with customers. In other areas, we have not -- I'm not sure of your question. Our new products, we'll introduce them at prices that we think provide the customer with a meaningful reduction in cost of ownership and provide the kind of margins that we would expect, attractive margins that we would expect in our business. Did I answer -- Steve, I think I answered your question but I want to make sure.

Actually just to rephrase it maybe, with the new products you're introducing do you expect simply cost reduction or pricing strength above what you presently have?

What we've talked about is we've looked for and developed products where we can bring a lower cost of ownership to our customers while maintaining the kind of margins that we would expect.

One other quick one. You mentioned 130-nanometer copper position is unchanged at eight customers and that the node is fully commercialized. You mentioned on your last call that your goal 10 to 12 customers for POR. Is this still a realistic goal considering those comments?

We didn't say we thought the node was fully commercialized. In fact we think the node will continue to grow through 2006.

Fair enough.

Operator, we've got time for one more question.

Your final question comes from John Pitzer.

Yes, can you hear me?

Yes, we can.

This is -- for John. I don't know if you disclose this regularly or I missed it. Did you say how much copper was as a percent of your revenues and non-copper slurries were? I know you mentioned sequential changes there.

We said that copper represented 22.8% of our revenue in our second fiscal quarter up from 21.5% in the prior quarter.

Okay. And do you give out your breakout exposure by end market segment, say foundry versus logic and memory?

No, we haven't done that in the past. I think there's a lot of focus in the industry, of course, on copper for advanced logic applications and that's a very important part of our business and a great deal of emphasis for us. We also are excited about the opportunities in memory where we see higher growth rates going forward and greater utilization of our dielectric and tungsten slurries. So they're both very interesting to us. The foundries, of course, have been a strong part of our business as well but we have not broken that out in the past.

Do you see any changes in terms of the copper adoption landscape as far as the memory guys are concerned, specifically DRAM?

We think that that's very early, that all the memory is -- essentially all the memory is still using aluminum wiring, not copper, but that should change over time.

That's more of an '06 or an '07 event do you think?

I'm sorry?

Is it more of an '06 or '07 event, in your opinion?

I don't think we can speculate on that. I would describe copper utilization and memory applications as in development, and I'm not sure that we're in the best position to predict when that technology will come to feasibility.

Thanks very much.

I want to thank you all for your questions this morning. Let me close with these summary comments. The first half of fiscal year 2005 has been challenging and disappointing to us all given the impact on our business of production down turns by a number of our customers. However, I am confident that our financial results for our second fiscal quarter, primarily reflect industry conditions rather than company-specific issues. I believe our company has embarked on a sound strategy and we are executing well on our three key initiatives of technology leadership, operations excellence, and getting closer to our customers. We continue to believe that we are the clear leaders in CMP slurry and our renewed commitment to technology, quality, and customers is beginning to significantly reinforce and enhance this position.

Our strong balance sheet and cash flow provide us the flexibility and capability to continue to make the investments that we believe will sustain our leadership well into the future as well as allow for investment in new growth areas which we are actively pursuing. Given our progress on our strategic initiatives along with a future recovery of the semiconductor industry which could occur later this calendar year based on predictions of some industry experts we continue to believe that we are well positioned for continued success. I want to thank you all for your interest in Cabot Microelectronics, and I look forward to speaking to you again.

Thank you for participating in today's Cabot Microelectronics second quarter earnings conference call. This call will be available for replay beginning at 11:00 a.m. eastern time today through 11:59 p.m. eastern time on Thursday, May 19, 2005. The conference ID number for the replay is 3993332. Again, the conference ID number for the replay is 3993332. The number to dial for the replay is 1-800-642-1687, or 706-645-9291. Thank you. You may now disconnect.