CMC Materials, Inc. (CCMP) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cabot Microelectronics third quarter earnings conference call. My name is Nicole and I'll be your coordinator for today. At this time, all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Mr. Bill Johnson, Vice President and Chief Financial Officer. Please proceed.

Thanks, Nicole. Good morning. With me today is Bill Noglows, our Chairman and CEO. This morning, we reported results for our third quarter of fiscal 2007 which ended June 30th. 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 will be archived for four weeks on our website. The script of this morning's formal comments will also be available there.

Please remember that our discussions 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 10-Q for the second quarter of fiscal 2007 ended March 31, 2007, and Form 10-K for the fiscal year ended September 30, 2006. We assume no obligation to update any of this forward-looking information.

I'll now turn the call over to Bill Noglows.

Thanks, Bill. Good morning, everyone and thanks for joining us. This morning, we announced strong financial results for our third quarter of fiscal 2007 which represent record performance in a number of areas, including record quarterly revenue of $89 million, record revenue for both our tungsten business and our recently acquired QED business, as well as record gross profit. We believe these results reflect continued successful execution of our three strategic initiatives -- technology leadership, operations excellence and connecting with customers, as well as improved semiconductor industry conditions following an inventory correction of IC devices which adversely impacted our results in the first two quarters of fiscal 2007.

Our revenues this quarter were up almost 16% from last quarter. During last quarter's conference call, we discussed the strong historical correlation between demand for our CMP products and revenue reported by the large Taiwan foundries which represent a very important part of our business. This historical correlation continued this quarter. As you remember, at the time of our last earnings call, we were hopeful that the upturn reported by the major Taiwan foundries in the month of March might represent an end to the broad industry inventory correction, but we felt it was too early to predict this turning point with confidence at that time.

With the 12% increase in revenue from our core CMP consumables business over the quarter just completed, we believe that our customers inventory correction is now behind us. Having said that, we remain cautious given the historical volatility of the industry and our limited visibility into downstream end use demand. As you know, our core CMP slurry business generates a strong and consistent flow of cash and along with our disciplined fiscal management of our business, provides us with a sound balance sheet. This fundamental financial strength has allowed us to continue to invest through all industry cycles, whether during an industry downturn or a strong market.

Now I'd like to provide a more detailed account of the progress we have made in each of our three strategic initiatives starting with technology leadership. During the third quarter, we made several public announcements that serve as evidence of our continued leadership in CMP technology. In May, we announced a major breakthrough in our CMP technology with our trademarked WIN product platform of tungsten CMP slurries for advanced technology nodes. This product line is designed to deliver ease of use and flexibility to various integration schemes. These products have been qualified and adopted by a number of memory customers and are currently in widespread evaluation by other potential customers in Asia and the United States.

Second, we announced significant technical improvements in our B6600 series of CMP slurries. This copper barrier slurry platform is intended to deliver an integrated solution to customers for advanced technology nodes. This product series is designed to provide customers with enhanced customization flexibility, superior electrical performance, and an attractive cost of ownership and is being used for technology nodes from 90 nanometers through 45 nanometers.

Finally, our new CMP pad technology continues to gain traction and we have made significant progress this past quarter. I will discuss this further in a few minutes. We are very proud of these accomplishments and we are committed to the successful execution of our technology leadership strategic initiative.

As we look to grow our business both domestically and globally, executing on our second strategic initiative, operations excellence, is vital to achieving our long term growth goals. Over the last several years, improvements to our supply chain have helped drive the quality and consistency of the products, processes and raw materials that make up our business. The result has been material savings achieved through productivity gains as well as accolades from customers that have clearly recognized the results of our efforts to improve the quality and consistency of our products. Our focus is to win the trust and loyalty of our customers and we believe our efforts over the past three years have been successful in gaining that trust.

Last quarter, we discussed our distinction of being the only CMP supplier to be awarded Intel's Preferred Quality Supplier or PQS award for 2006. This quarter, we were honored in a similar fashion by SMIC, when it awarded us its Excellent Supplier award in Shanghai on July 9th. We're very proud of this accomplishment and all the hard work and dedication that the team at Cabot Microelectronics put forward to achieve it.

We continue to make progress executing our third and final strategic initiative, connecting with customers. A great example of this is our intensive effort with customers to qualify our new D100 polishing pad. By working side by side with our customers during the testing, evaluation and qualification stages, we are able to directly share our extensive CMP process experience and knowledge with our customers and rapidly accelerate the qualification process.

As we collaborate with more and more customers, we believe that we're beginning to reduce the time it takes for customer adoption of our technology. The list of customers that currently buy our pads has now grown from four customers last quarter to seven customers this quarter, and we have another 20 customer locations in various stages of testing, evaluating, and qualifying our pad. We are encouraged by the fact that one of these new customers was able to complete all testing and qualification phases in just over three months. This is a substantial reduction from the nine to twelve month lead time that it took our first customers to qualify our polishing pad.

We are particularly pleased with the broad applicability of our pad technology. We are finding applications for our pad in all major CMP areas, dielectric, tungsten and copper, and in each of the logic, memory, and foundry segments. Our pad is being used or evaluated in every geographic region for 200 millimeter and 300 millimeter wafer fabs across a wide range of technology nodes from 180 nanometer to 65 nanometer and for the Applied Materials and Ebara tool sets. We are happy with the momentum that we are generating in our CMP polishing pads business and look forward to building meaningful revenue from it in the near term.

A second success indicator from our connecting with customers initiative is the positive feedback we are receiving from our customers in the Asia Pacific region. Recently completed infrastructure and customer support projects in Japan, Taiwan, and Singapore have meaningfully increased our responsiveness and service to our customers in this key area.

I'll close my comments this morning with a one year anniversary update of our QED Technologies acquisition. As you may recall, QED Technologies specializes in unique, patented polishing and metrology systems for high precision optics. As part of our Engineered Surface Finishes or ESF initiative, we acquired the company last July to gain commercial entry into the precision optics market with leading edge technology and to gain access to an outstanding team of scientists, engineers and associates. Looking back on the past year, we are delighted with our choice to partner with this company. The integration was completed seamlessly and on schedule and revenues for the first year were approximately 45% higher than during the 12 months preceding the acquisition. This performance has exceeded our expectations.

As with our core CMP business, the QED business is technology driven. As evidence of this, QED in conjunction with Lawrence Livermore National Laboratory and Zygote Corporation, recently won a coveted R&D 100 award for 2007. This award was received for technology that enables the manufacture, precision and world class performance of continuous faceplates using the optics chain for very large laser systems. This prestigious award is granted by R&D Magazine for the 100 most technologically significant products introduced into the marketplace in the past year. Scientists and engineers in our core CMP and ESF businesses are actively collaborating with the QED scientists and engineers to leverage their respective capabilities.

In addition, we're using our global CMP infrastructure to support QED's growing global presence, especially in areas like Japan. For example, we plan to utilize our Asia Pacific Technology Center to house optics equipment for QED customer demonstrations.

We continue to believe that there is value in diversifying our business into areas outside the semiconductor industry where shaping, enabling and enhancing the performance of surfaces is critical to success. We are pleased with the performance of the acquisitions we have made to date and we believe that additional acquisitions to fulfill our ESF growth initiative as well as to grow our core CMP consumables business can represent productive uses of available capital.

And with that I'll turn the call over to Bill Johnson.

Thanks, Bill. Our revenue for the third quarter of fiscal 2007 was $89 million, which as Bill mentioned represented a record level for our Company. Revenue this quarter was up by 15.6% from the prior quarter and we saw sequential revenue increases in all business areas except slurries for data storage polishing applications. Notably, our QED business reported its highest quarterly revenue in its ten year history. Revenue in our third quarter was up by 4.8% from the same quarter a year ago.

Drilling down into the quarterly revenue number, tungsten slurries contributed 39.7% of total quarterly revenue with revenue up 17.3% sequentially and we achieved a new quarterly revenue record in our tungsten business last quarter. Sales of copper slurries represented 16.4% of our total revenue and increased 3.7% sequentially. Dielectric slurries provided 30.7% of revenue this quarter with sales up 15% sequentially. Data storage products represented 5% of our quarterly revenue. This revenue was down 10.2% sequentially. Finally, revenue from our ESF business which includes the QED business, generated 8.1% of our total sales and our ESF revenue was up 78.5% sequentially.

On a geographic basis, sales in all geographies except Southeast Asia grew sequentially. Of special note, sales in Korea increased sequentially by over 70%. Sales in Europe grew by 32% and sales in Taiwan were up almost 16%.

Our average selling price for slurry products increased by 1 % compared with the March quarter mainly due to a higher priced product mix. The average selling price was 0.9% higher than in the same quarter a year ago, primarily as a result of the higher priced product mix and the benefits of our recent dielectric price increase, partially offset by price reductions in certain other areas.

As a percentage of revenue, gross profit was 47.7% this quarter, which was 3.8 percentage points higher than the 43.9% of revenue we reported in the prior quarter, and 0.1 percentage points higher than 47.6% in the year ago quarter. Gross profit this quarter benefited by higher utilization of manufacturing capacity based on the higher level of sales as well as higher yields in our production operations and lower fixed manufacturing costs. Gross profit for the first nine months of the fiscal year was 46.6% of revenue. This is consistent with our full year guidance range of 46% to 48% of revenue which remains unchanged.

Now I'll turn to operating expenses which include research, development, and technical, selling and marketing and general and administrative costs. Operating expenses were $27.9 million which is within our guidance range of $27 million to $30 million per quarter. This quarter's expenses were $1 million lower than the $28.9 million we reported last quarter. Key factors affecting operating expenses this quarter were lower depreciation expense and lower staffing and compensation related expenses. This quarter's operating expenses were $1.2 million higher than the $26.7 million in the same quarter last year primarily due to the acquired QED business. We expect operating expenses to continue to fall within the range of $27 million to $30 million in our fourth fiscal quarter.

Below the operating expense line in our income statement is a line labeled Other Income and Expense and ordinarily this mainly reflects interest income on our cash balance. However, this quarter this line item also includes a $2.1 million charge to reflect the write-off of our minority equity investment in NanoProducts Corporation which develops and produces specialty nano scale materials. You may remember that three years ago, we took a minority ownership position in NanoProducts and entered into a collaboration agreement to co-develop innovative nano abrasive particles for use in next generation CMP slurries and other specialty polishing applications. We have now chosen to not renew our collaboration agreement with NanoProducts. In addition, while we continue to hold an equity interest in the company, NanoProducts recently entered into funding arrangements that included commercial terms that we believe will make it difficult for us to recover the value of our investment. As such, it was appropriate to write-off the remaining value of our investment this quarter, which, as I mentioned before, was $2.1 million pre-tax.

Reflecting our record revenue and gross profit as well as operating expenses and the burden of the NanoProducts write-off, net income for the quarter was $10.1 million, up from $4.5 million last quarter and up from $9.8 million in the same quarter a year ago.

The weighted average number of shares outstanding on a diluted basis this quarter was 23.7 million, essentially unchanged from the prior quarter.

Diluted earnings per share were $0.42 this quarter, up from $0.19 last quarter and up from $0.40 in the year ago quarter. Excluding the non-operating write-off of NanoProducts, EPS would have been $0.48, which would represent one of the highest levels in our Company's history.

Turning now to cash and balance sheet related items, capital additions for the quarter were $1.8 million. Depreciation and amortization expense was $5.9 million and share based compensation expense was $3.2 million for the quarter.

We ended the quarter with $184 million in cash and short-term investments, which was $20.4 million higher than last quarter. Cash flow reflects a $6.8 million decrease in working capital, primarily due to a reduction in raw material inventory. In addition, accounts receivable days of sales outstanding, or DSOs, improved from 54 to 50 days. We're pleased with our continued strong cash flow since this allows us to continue investing in our core CMP consumables business as well as pursue potential growth opportunities through M&A activity in our ESF business.

I'll conclude my remarks with a few comments on our current outlook. After a challenging first half of the fiscal year, we were pleased to see demand for our products turn up in our third fiscal quarter. Looking at our revenues in each of the three months of the third fiscal quarter, we saw a significant increase from April to May and sales activity remained at the same higher level from May through June. As we observed orders for our CMP products received to date in July, though we expect to ship by the end of the month, we see July results trending generally in line with May and June results. However, I would caution, as I always do, that several weeks of CMP related orders out of a quarter represent only a limited window on full quarter results.

Also I would like to remind you that QED's business, which is mainly equipment oriented, generates lumpy or uneven quarterly revenue and the record revenue experienced by the QED business this quarter may not occur again next quarter.

I'd like to update our guidance on capital spending for fiscal 2007. We entered the year with an expectation to spend approximately $17 million. Through three quarters of the year, we have spent approximately $7 million and we now expect our full year capital spending to be around $10 million. Our full year estimate reflects lower than expected spending for the QED business, timing of CMP related projects and continued prudent capital management of our capital expenditures.

Now I'll turn the call back to Nicole as we prepare to take your questions.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Dmitry Silversteyn with Longbow Research. Please proceed.

Good morning. Didn't expect to be the first guy on the call. Just wanted to kind of get into a little bit on the pad business. You got three new customers, it looks like, since the last quarter. The last customer, at least one of the customers, got the pads approved quicker. You sound a lot more confident than in talking about generating material revenues which I'm assuming means revenues which you'll be disclosing to us in the near future. Am I phrasing this correctly? Are you, is your confidence level in the success of the pad business improved since last time we talked?

Yes, I think you characterized it well, Dmitry. I think the more and more we're out there in the field with customers, the more confidence we get that our technology is what we think it is and that the pad life that we are representing is coming true, and your characterization is, I think, correct. We are more optimistic based on the information we see from the field and from customers and we're excited about this growth opportunity for the Company.

Very good. To follow-up on the record tungsten slurry sales you've had in the quarter, can you give us kind of a little bit more color on what drove that? Is it just a particular mix of where semiconductor production took place in memory versus logic or is it something that you've done to drive revenues higher?

Well, I think we've been pretty clear that we enjoy a very strong position in tungsten CMP slurries. We have great products. We've always had great products and we continue to innovate and bring new higher value products to our customers. In the quarter, we saw -- the first area of strengthening sales we saw was in memory and memory was, I guess I described memory revenue was very robust early in the quarter and continued on to the end of the quarter, and as you know, a lot of our dielectric and tungsten products get sold into the memory market. I think in Bill's comments he mentioned significant growth in South Korea which is mostly memory so we feel like memory, the robust nature of the memory market is what caused the strong sales for tungsten and dielectric CMP slurries.

Okay. Very good. On the dielectric price increases that you've passed through, can you give us an idea of kind of how the customers received them, to the best of your ability? Have you -- obviously you haven't lost any market share yet because you're in a contract with a lot of suppliers, but how smoothly has that gone and is there a danger that a year from now we'll be looking at some market share loss because of unhappy customers as a result.

Well, just to give you a little more color, the dielectric product line has been around the longest. It's probably the most commoditized, if you will, of all of the CMP slurry offerings in the market today. We've had products that have been in the market since the mid to late '90s. One of the work horse products for Cabot Microelectronic is a product called Semi-Sperse 25 that was introduced when this Company was still part of Cabot Corporation. That product has been significantly improved and made better over the years that we've marketed and sold it and we just felt like we deserved to get more value as a result of our hard work to make that product the product it is today so we went to that market last November and had a price increase. My view is that that price increase was fairly well received relative to other price increases I've been involved in outside the semiconductor industry. We got it through. I think one of the things we perceived as a potential risk was it might turn our customers off to looking at our pad technology which has not happened, so we feel pretty comfortable that our customers understood why we thought we needed a price increase and they understood the value that we are bringing them on their dielectric CMP slurries and that that price increase was accepted.

Okay, very good and then switching gears, one last question on QED. Given the record sales in the quarter, are we pretty much done with the high value inventory that you started the ownership of this Company with and should [see] margins in that business improve going forward?

Dmitry, it's Bill Johnson. We -- as we made the QED acquisition, the written up value of the inventory was 2.1, sorry $2.2 million and through the four quarters since we've made the acquisition, we worked through $1.3 million of that $2.2 million so there's still $0.9 million of the write-up effect that still has to work through the P&L.

Okay, so we'll probably see the -- little bit of a lingering impact of this into your fiscal '08 then?

Probably the next two or three quarters probably.

Okay. Thank you very much. I'll get back in queue.

All right. Thank you.

Your next question comes from the line of Suresh Balaraman with ThinkEquity. Please proceed.

Thanks. Maybe I missed a comment. Did you guys make a comment on how the demand has been in the first three weeks of this month?

I did, Suresh. We have seen through the first three weeks of July, we've seen demand of the slurry products, orders for the CMP slurry products, at par with what we saw in the May and June months of the previous quarter so sort of flattish with May and June and as I mentioned, from April to May, we saw a step up in revenue and then May to June kind of a similar strength.

So you're looking at essentially $30 million monthly run rate in the ballpark, is that the way to read that?

You'll have to do that calculation.

Okay. The more important question that I had in mind was whenever we see such a sharp jump in your revenue historically, it had been associated with inventory build-up of customers. It used to be the foundries, when you used to have the distribution agreement but I'm wondering if the same thing is happening with the [inaudible] given the jump of 70% sequentially. That seems an extremely high number.

Well, we've seen this before, Suresh. It's not unusual for our Company to see a steep ramp-up in sales after two or three sequential quarters of a soft market environment. I guess I would sort of agree with your comment. I wouldn't expect to see the same kind of ramp next quarter, in that we've probably filled some inventory channels around the world to get ready for what the industry sees as a recovery, but we're delighted with the sales we saw this quarter and as Bill's comments about the first three weeks in July would indicate that we at least are starting the quarter with similar kind of rates. So we'll see what happens. But we've seen that happen to us before where we have a blowout quarter following two weak quarters and then the next quarter turns down just a little bit so we'll see what happens this quarter. You're right. We no longer have the distributor between ourselves and the large market in Taiwan, so that is historically different than what we might have seen in the past.

Also, you can't neglect the impact of the QED revenue. Our QED revenue this quarter was $6.6 million. That was almost twice the prior quarter and given uneven as in expected equipment sales, you might discount that in the next quarter or so probably.

Okay. Thanks, guys.

Thanks very much.

Your next question comes from the line of Steve O'Rourke with Deutsche Bank. Please proceed.

Thank you. Good morning.

Good morning, Steve.

When you think about kind of the strength you've seen and the new products that have come out, how do you look at ASPs here in the September quarter? And on a second note, should we think about gross margin kind of on a similar level as we go out into the September quarter, all things being equal?

Steve, this is Bill Noglows. Our gross margin guidance remains the same, 46% to 48%. We haven't changed it based on the results we saw this quarter, and we're sticking to it, so it's 46% to 48% for the full fiscal year. I think Bill said we're currently at 46.6%, I think. Bill, what's the number you [gave]?

That's right, through three quarters.

Through three quarters and we, again, we continue to guide between 46% and 48%.

I guess there is one nuance here. Recall last quarter, given the first, the weak first half, we were guiding toward -- at the low end of that range, and this time our comments are we'll be within the range of 46% to 48% so there's a bit of a nuance there.

Okay, and maybe I'll ask the first question a little differently. Was there anything unusual in the ASP strength in the June quarter?

No, I don't think so. You first asked a question about -- kind of implying there might be impact of new products, and we're constantly introducing new products and we try to introduce those as higher price, higher margin products but given the nature of the business and the long qualification time, new products don't tend to have a big impact in any particular quarter. They tend to be feathered in over time. So basically what we saw is pretty stable pricing environment across all of our application areas. Otherwise a little bit of a mix effect and a little bit of a price reduction effect but basically pretty stable.

Okay, and on the positioning front, how is copper barrier slurry positioning going? You mentioned that I think compared to March. And secondly, are you seeing additional competition from companies like ATMI who I think mentioned on their call yesterday something about a foundry link.

Well, let's start with the first question first. Copper barrier is an area where Cabot Microelectronics historically has not had the kind of position that we think we should have and so we've been working over the last year and a half to develop a new family of copper barrier products. It's the 6600 family and a couple of other families that are in development or is in the result of JDAs and JDPs with some of our customers. So far, we're excited about what we see from these products. Their performance and cost of ownership is, we think is the best out there and we are hopeful that we will win significant positions going forward.

We don't talk about competitors, Steve. We believe that the industry has somewhat stabilized a bit in terms of new entrants into the space, and a lot of people make claims about their positions in CMP space and with CMP slurries. We think we have visibility into all the customers, all the markets and all the applications, and I'll leave it at that.

Okay and one last just question on NanoProducts. Did you derive anything from the NanoProducts collaboration over the past few years that can directly or does directly contribute to your revenue base now?

We learned a lot from working with NanoProducts from a technical point of view. We learned a lot about particles and the interaction of specific particles, particle sizes, particle morphologies and their impact on CMP performance and cost. We went into that, to take you back three years, we went into the relationship with NanoProducts with two things in mind. One, to engineer our -- with the idea of engineering specific particles or alloys of particles to do very unique things in the CMP process. We did that at a time when CMP slurries were heavily loaded with particles up to 25%. Since that time, we focused on formulating out many of the high cost particles and replacing those particles with what I would describe as very aggressive and selective chemistries to do the CMP work so we can provide our customers with a lower cost of ownership offering as well as higher margins for Cabot Microelectronics. So several things changed along the way as well as NanoProducts' business model changed quite significantly so we chose to move away from them. They're a great company. They have great technology. It's just that we're not really a good fit at this point and we found that we can buy our abrasive particles from many other sources.

Fair enough. Thank you.

Thanks, Steve.

Your next question comes from the line of Chris Blansett with JPMorgan. Please proceed.

Hi, guys. Couple things here. When you look at your -- the progress you have in your pads business at customers or your in-production, what's the penetration rate inside those customers? How are you looking at additional revenue for those customers versus places where you still are just in the initial qualifications?

It's -- excuse me, Chris, it's Bill Johnson. We're selling to seven customers and in almost all those cases, it's really kind of a, we're dipping a toe in the water. We tend to be qualified. We get adopted on a machine or two or three and then over time, they add more lines, more machines, and that's the expectation, but at this point, it's pretty limited penetration at any one customer but we are happy that we've increased the number of customers from four to seven.

One of the things that we're especially happy about with respect to the pad business is the breadth of the applications. As we introduced this pad initially, we were really focused principally on oxide -- more mature dielectric type applications, and as Bill mentioned in his prepared comments, we're seeing really broad application of this tungsten, copper, dielectric, live memory foundry, applied bar tools, a range of technology nodes, a range of regions, 200/300 millimeter wafers, so we think there's a lot of potential but at any particular customer, we're pretty limited in our penetration right now.

So would you say that, at -- say you pick one -- the customer you have the most penetration, are you still like under 20% of their total pads market?

Oh, yes, far below that.

Okay. And in general, have you, are you guys willing to quantify yet how much pads business was during the quarter or maybe exiting the year, what kind of percentage of revenues you think it's going to be?

Well there's one -- we're not ready to call out revenue yet but there's one indication that I could share. If you remember in our second quarter, we describe that the pad business had -- represented a drag on gross profit by 1.5 percentage points which represented $1.1 million of negative gross margin. For this -- the current quarter, it's on the order of $500,000 of negative gross margin and only about a half to seven tenths of a percentage point drag. Now I wouldn't encourage you to draw a straight line through those two points. We're going to have ups and downs but that was the impact on gross margin -- gross profit margin this quarter relative to last.

Okay, and then looking at basically the QED related sales and your finished surface products or your advanced surface products division, how much of the revenue for QED was tied to specialized slurry sales? I couldn't quite make it out.

The bulk of it, Chris, is tied to equipment sales.

Right. I just wasn't sure this quarter how much associated revenue you get from slurries going into QED equipment?

The consumables piece is relatively small. Historically, if you look at it on a historical basis, QED's revenues are about 70% equipment, 20% consumables and service, and then they have about 10% in contract R&D. This quarter, they had quite a number of machines that they realized sales on and they also had some pretty significant R&D -- contract R&D revenue, so the consumables piece and service piece historically at 20% is probably a little less than that this quarter.

Well with the kind of the, I guess, the increase in the equipment sales, should we start expecting to see a modest increase in the associated slurry sales as well?

The mix may remain about the same. That could happen, I guess. I wouldn't build that into a model. If it occurs, that would be great but I think the 70-20-10 split that I mentioned is probably appropriate in the near term.

All right, and then I think previously we spoke about you guys were thinking about moving more slurry production to Taiwan to reduce some shipping costs and I wasn't sure if we can get an update on that?

We put that on hold, Chris. We think there are activities, our Six Sigma activities to look for productivity enhancements as well as some of the new formulations we are offering to our customers have resulted in finding capacity in our system that allows us to not make that capital investment in Taiwan at this time. So we do not see it for this year and I would expect that we would not see it for next year either. But we continue to evaluate those kind of strategic decisions as we go.

And then what was your headcount at the end of the quarter?

No significant change. I think the last thing we reported was around 750. I think we may be around 770, something like that now.

Okay, thank you very much.

Thanks, Chris.

Your next question comes from the line of Amy Zhang with Goldman Sachs. Please proceed.

Good morning.

Good morning, Amy.

Hi. A quick question. I think one of your competitors in the U.S. targets nice market share gain in the slurry market going forward, particularly at tungsten slurries. I was wondering what is your strategic direction of that business and also have you seen any visible changes of the competitive landscape in that market?

In the Tungsten market, Amy?

Yes. Tungsten slurries.

We have not seen any visible change in that market or our position in it. I think it's public knowledge that we are defending our technology against one particular competitor, while defending our intellectual property but we have, as I said earlier, we have a very strong position in tungsten CMP slurries. We think we have very strong and significant intellectual property protection which we will enforce and we do not see changes in that specific market.

There's, during the quarter, we issued a press release announcing a new product family in Tungsten, the WIN series, and this is W7000 and W73, sorry, W7000 and W7300. One is a high selectivity slurry so it's high selectivity for polishing one material versus another. The 7300 is a tunable selected slurry so you can tune the selectivity from essentially no selectivity to high selectivity. We think that those are two really powerful products and they are being adopted relatively broadly and that builds on the strength of the W2000, sort of our work horse product, so in terms of the tungsten product line, we really have strength on strength and we're very, very satisfied with our position there.

And then with the new products and then some good strategies there, do you expect additional market share again for tungsten slurries this year? Or just the market share will remain fairly stable?

We think the market share will probably remain fairly stable. Tungsten is fairly unique in that there's a number of what we describe as home brewers, and that's our customers that still manufacture their own CMP slurries. We think there's opportunity for us to cause them to switch from their own home brewed tungsten CMP slurries to our new tungsten products, both to gain efficiencies as well as what we think is more higher performance from our products versus the ones they currently brew in house.

Okay, sounds great. Thank you.

Operator? We'll take one more question, please.

Okay, your final question comes from the line of Colin McArdle with Needham. Please proceed.

Good morning and thanks for taking my questions.

Good morning, Colin.

I think in Q2, we talked about a yield issue and I wondered if that had been resolved?

Yes. Colin, last quarter, recall that we had relatively low gross profit margin in terms of percentage of revenue, 43.9%, and we attributed -- one of the causes we attributed to that was a lower yield on our manufacturing operations. If you listen to the comments this quarter, one of the causes for the improvement in gross margin this quarter versus last was improved yields in our manufacturing facilities, so we have ongoing intensive efforts through a Six Sigma program with really literally tens of projects all targeted toward reducing variability and variation and improving productivity, and that translates into -- in a number of cases, into higher yields, lower waste. Typically, quarter to quarter, we can see some fluctuations in this but we were happy with the improvement in yield this quarter and it represented a reversal of the issue that we mentioned last quarter.

Would you qualify that as a full reversal of the issue or is there still opportunity to improve margin just on that?

Oh, there's always opportunity to improve yield, but we have -- to put this into perspective, within our engineering ranks, we have a team of say 25 to 30 engineers that are all focused on projects to reduce variation and improve productivity, and if you've watched the Company over the past years, quarter to quarter we see some volatility in our manufacturing yield but I think if you look at long term trend, we've seen improvement in that over the past three years that we've been doing the Six Sigma effort, so I would expect to see continued fluctuations over time but I think there's a general improvement trend that we've experienced that we would expect to continue to experience.

Okay, thanks and just one follow-up. Yesterday we heard that chip production in Taiwan had increased 15% in the quarter you just reported, and expectations were that it would increase another 10% sequentially in the current quarter and I wonder if that was consistent with what you're hearing?

Well if you look at our sales during our third fiscal quarter, the June quarter, in Taiwan, our Taiwan sales were up 16% sequentially, and we heard, I think, TSMC announce this morning an expectation of a 13% to 16% revenue growth from the June quarter to the September quarter. Historically, there's a very strong correlation between our revenue and the reported revenue of the larger Taiwanese foundries so to the extent that the Taiwan continues to grow, given our strong position there, we would expect to participate in some of that.

Okay and then I'm sorry, finally, the linearity in the quarter obviously was altered and I wondered if that is what you're expecting for this quarter or do you expect it to become more linear as a reversal of a trend that was one quarter off?

Usually, the revenue month to month within a quarter is sort of an outcome for us. We don't have very much visibility into that, so I think I'd have to leave it with what we commented about, what we've seen in July to date, July to date orders for CMP products is on par with what we saw in May and June, and couldn't really forecast anything for the next quarter.

Well, thank you.

Thank you, Chris.

Thanks to all of you for your time this morning and your interest in Cabot Microelectronics. We look forward to the next opportunity to speak with you. Goodbye.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.