CMC Materials, Inc. (CCMP) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the forth quarter 2007 Cabot Microelectronics earnings conference call. My name is Danielle and I will be your coordinator for today.

At this time all participants are in listen-only mode and we will conduct a Q&A session toward the end of this conference. If at any time during the call you require assistance, press star-zero. A coordinator will be happy to assist you.

I would like to turn the presentation over to your host for today's call, Ms. Amy Ford, Director of Investor Relations. Please proceed.

Thank you. Good morning.

With me today are Bill Noglows, Chairman and CEO, and Bill Johnson, Chief Financial Officer. This morning we reported results for our fourth quarter and full fiscal year 2007 which ended September 30. A copy of our press release is available in the investor relations section of our website, cabotcmp.com, or by calling our investor relation office at 630-499-2600.

Today's conference call is being recorded and will be archived for four weeks on our website. This script of this morning's formal comments will 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 form 10Q for the third quarter of fiscal 2007 ended June 30, 2007 and Form 10-K for the fiscal year ended September 30, 2006. We're under no obligation to update any of this forward looking information.

I will now turn the call over to Bill Noglows.

Thanks, Amy. Good morning, everyone and thank you for joining us.

This morning we announced our financial results for the fourth quarter and the full fiscal year of 2007 which represent several significant milestones and accomplishments our company has achieved this year.

Demonstrating our continued successful execution of our core CMP consumable strategy, we received several supplier awards during the year including the attainment of Intel's preferred quality supplier award for the first time.

We also introduced several new and improved slurry products to the market and brought our new polishing pad manufacturing capacity on-line to serve our growing base of pad customers. All of this was accomplished while we successfully integrated our acquisition of the QED business. It has been a very busy and rewarding year.

Total revenue for the quarter was $90.4 million, represents our second consecutive quarter of record revenue. For the full year we achieved record revenue of $338.2 million despite the semiconductor device inventory correction that adversely impacted our revenue in the first half of the year.

During our fourth fiscal quarter we experienced our highest quarterly gross margin percentage in three years. More important, fiscal 2007 was the first year in our history that our annual gross profit as a percentage of revenue increased from the prior year.

We believe these accomplishments were driven by our focus in execution on the company's three strategic initiatives within our core CMP business; technology leadership, operations excellence and connecting with customers. Historically technology leadership has meant developing higher performing products because this was the most important factor in our customer's purchasing decisions when CMP technology was first being employed in the manufacture of IC devices. However, as end use consumer demand for lower cost devices has continued to grow in parallel with the industry's traditional emphasis on PCs our customers are much more cost sensitive than had been previously. As a result we have refined our technology leadership initiative over the past couple years to innovate for a low cost of use as well as high performance.

We believe that innovating for lower cost is a win-win proposition. By introducing new, more cost effective, high performing products to the market we believe we can reduce the overall cost of ownership for our customers while maintaining our gross profit margin.

To illustrate this point, we have improved the cost effectiveness of certain CMP slurries by designing products with more chemically aggressive solutions that rely on lower concentrations of abrasive particles which are the costly mechanical element of chemical mechanical planarization slurries.

We have also utilized our extensive knowledge of CMP chemistry to formulate concentrated slurry products that can be diluted by our customers before use in their fabs which saves on shipping and packaging costs and lowers our capital needs by effectively increasing our manufacturing capacity. As a result of this focus and this year we have introduced new lower cost of use products across several application areas.

Next I would like to discuss our how achievements through our operations excellence initiative have contributed to our strong performance this year.

First, we achieved a 6% productivity improvement in our manufacturing operations in fiscal 2007. Which builds on the 12% cumulative improvement we captured over the previous two years. For the third consecutive year, our productivity enhancements have been driven by a long list of variation reduction projects implemented under our Six Sigma program which have resulted in improvements in areas such as higher manufacturing yields, shorter cycle times and increased labor efficiency.

In previous years our annual productivity improvements have been largely offset by corresponding decreases in average selling price for our slurries reflecting competitive pricing pressures. However, with the recent advantage of stabilizing prices, the effect of our productivity initiatives and the improvements we achieved this year are more readily visible in our financial results in the form of higher gross profit margins.

As we saw earlier in this year, utilization of our manufacturing capacity affects our profitability at the gross margin level. While we were subject to industry demand swings, we were able to proactively optimize and manage our manufacturing capacity. To this end, during the fourth quarter, we decided to close the company's manufacturing facility in Barry, Wales which is our smallest manufacturing plant and has been under utilized over the past several years. Although it's always difficult to decide to close a plant, the decision was made to improve our operational efficiency and competitiveness in this cost sensitive environment. We are transitioning this plant's production to other manufacturing facilities in the U.S., Japan and Singapore over the next nine months and are working closely with our customers to make this transition seamless to them.

We continue to make progress on our third strategic initiative connecting with customers. As part of this initiative, we are actively collaborating with customers to understand their processes and requirements so that we can supply them with solutions that meet their performance and cost requirements. Recently much of our customer collaboration efforts have revolve around our D-100 polishing pad offering. Given the broad applicability of our pad technology, we seen numerous opportunities for our pads in all major CMP application areas and across a wide range of technology nodes and tool sets.

During the fourth quarter, we secured another customer win in our pad business. We are especially excited about this new customer since it represents our first pad adoption for use in a copper polishing application. It also demonstrates our ability to win pad business in leading edge technologies as our pad is being used to polish 300mm wafers in this customers 65nm technology node process.

This brings our total number of pad customers to eight, with another 20 customer locations in various stages of testing, evaluating and qualifying our pad. We are energized by the progress that we have made this year in our pad business and we remain encouraged that in addition to the opportunities that we see for new customer adoptions, significant opportunities exists for additional business with our current customer base, positioning us for further success in 2008.

Another indicator of success from our connecting with customer initiatives was evident when we were honored with Samsung's Supplier Appreciation Award for best in value at their supplier appreciation day in California two weeks ago. We are proud to be only one of four suppliers to be recognized with an award at this event. We believe this award demonstrates our strong partnership and collaboration with this important and strategic customer.

Finally, as part of our connecting with customers initiative, we are always actively looking for ways to better serve our customer base around the world. As a result, we are planning to invest in a new state of the art 300-millimeter polishing tool and related metrology equipment for our Asia/Pacific technology center in Japan, which will represent a significant capital investment in fiscal 2008. We believe this investment will compliment our existing 300 millimeter capabilities in the U.S. and enhance our ability to develop next generation copper and barium products as well as provide realtime 300mm service and support to our Asia/Pacific customers. In conjunction with this investment in the Asia/Pacific region, we plan to add to our research and development talent there. We recently implemented a small work force reduction in the U.S. as part of our ongoing efforts to manage costs. By initiating the staffing reduction in the U.S., we believe we can invest in 300mm tools and talent for the Asia/Pacific region without significantly increasing total operating expense.

We believe that our investment in this tool, as well as our additional research and development resources in Asia, will allow greater collaboration with our customers in the region, increase our responsiveness, and facilitate quicker and more efficient new product development. To broadly summarize our approach within our CMP business, we strive to maintain our gross profit percentage by innovating new products for high performance and low cost. Improving productivity and pricing our products for the value they bring and to reflect the investment in research that went into developing and improving them. We also aim to contain operating expenses by shifting resources to Asia rather than adding overall resources to support our customer relationships. We believe that continued execution of our strategic initiatives has resulted in our solid profitability and consistent cash flows which allow us to weather industry cycles such as the one we experienced in the first half of the fiscal year and to invest further in our business by funding research and development, capital expenditures, and M&A activity.

I will close my comments this morning with an update on our engineered surface finishes or ESF initiative.

In addition to the accomplishments we achieved in our core CMP consumables business in fiscal 2007, we are also encouraged by the success of our ESF business. In fiscal 2007 we began to reap the benefits of our QED acquisition through leveraging of technical knowledge and the global infrastructure of the two organizations. The QED acquisition has exceeded our expectations as the integration was seamless and the business posted revenue of $18 million in fiscal 2007, compared to the $13 million in the 12 months preceding the acquisition. As we look forward -- as we look toward the future, we look forward to continuing expansion in this area both through organic growth and M&A opportunities. And with that, I will turn the call over to Bill Johnson. Bill?

Thanks, Bill. And good morning, everyone. Our revenue of the fourth quarter fiscal 2007 was $90.4 million. Which as Bill mentioned represented our second sequential quarterly revenue record. Total revenue this quarter was up by 1.5% from the prior quarter, and revenue from our CMP business was up 5.3%.

We saw sequential revenue increases in all business areas except ESF, which primarily reflects revenue from our QED acquisition.

You may recall that in our third fiscal quarter we achieved record revenue in our QED business, so we were surprised that our fourth fiscal quarter was lower since this equipment oriented business can be uneven.

Total revenue for the full fiscal year was $338.2 million, which was a record for our company. Total revenue in fiscal 2007 represented a 5.4% increase from the previous year, and reflects the addition of the QED business acquired in July 2006.

Drilling down into the quarterly revenue number, tungsten slurries contributed 38.6% of total quarterly revenue, with revenue up 1.5% sequentially. And we achieved our second sequential quarterly revenue record in our tungsten business.

Sales of copper slurries represented 18.5% of our total revenue, and increased 14.7% sequentially. Dielectric slurries provided 32.3% of revenue this quarter with sales up 3.4% sequentially.

Data storage products represented 5.5% of our quarterly revenue. This revenue was up 11.7% sequentially.

Finally, revenue from our ESF business, which includes QED, generated 4.7% of our total sales, and our ESF revenue was down 41.1% sequentially.

On a geographic basis sales in all regions of Asia grew sequentially except Korea. Our revenue in both the U.S. and Europe also decreased.

Our average selling price for slurry products increased slightly compared to the June quarter. For the full year, average selling prices increased by 1.6%, mainly due to a higher priced product mix.

As a percentage of revenue, gross profit was 49.1% this quarter, which is 1.4 percentage points higher than the 47.7% of revenue we reported in the prior quarter and 4.7 percentage points higher than in the year ago quarter.

Gross profit this quarter benefited by higher utilization of manufacturing capacity based on the higher level of sales.

Contributing to the increase over the prior year was the absence of the $1.1 million one-time write-off of production assets in the fourth quarter of 2006 associated with retrofitting a building for our pad business.

For the full year, gross profit percentage was 47.3%, higher than the 46.5% in fiscal 2006. As bill mentioned, this was the first annual increase in gross profit percentage in the history of our company.

Now I will turn to operating expenses which include research development and technical, selling and marketing, and general and administrative costs.

Operating expenses of $30.3 million increased by $2.4 million sequentially, and were $2.1 million higher than in the same quarter last year. The sequential increase was primarily driven by higher accruals for the company's annual cash bonus program and higher professional fees which were partially offset by lower expenses for clean room materials.

The year-over-year comparison was impacted by higher accruals for the company's annual cash bonus program and higher professional fees, partially offset by the absence of $1.8 million of one-time research and development write-offs taken in the fourth quarter of 2006.

For the full year, operating expenses increased by $9.6 million, from $104.6 million to $114.2 million, primarily due to the inclusion of a full year of operating expenses related to our QED business and high professional fees.

Reflecting our record revenue, increased gross profit, but also higher operating expenses, net income for the quarter was $10.2 million, up slightly from $10.1 million last quarter, and up from $8.2 million in the same quarter a year ago. The weighted average number of shares outstanding on a diluted basis this quarter was 23.8 million.

Diluted earnings per share were $0.43 this quarter, up from $0.42 last quarter and up from $0.34 in the year ago quarter. For the full year, EPS was $1.42, up from $1.36 reported in fiscal 2006.

Turning now to cash and balance sheet related items, capital additions for the quarter were $2.6 million, and this brings our full year capital additions to $9.5 million, which includes investments to establish our pad manufacturing capacity in the U.S. and Taiwan. This represents the lowest annual capital spending in the company's history which I think reflects our continued prudent management of capital expenditures as well as the low capital intensity requirements of our CMP business model.

Depreciation and amortization expense was $6 million in the fourth quarter, and share based compensation expense was $3.4 million.

We ended the quarter with $212.5 million in cash and short-term investments, which was $28.5 million higher than last quarter.

Cash flow reflects $6 million contributed from the exercise of stock options during the quarter, and a $3.7 million decrease in working capital.

We are delighted with our continued strong cash flow since this allows us to continue investing in our businesses through industry cycles. Our cash flow enables us to fund research and development projects, capital expenditures, and pursue strategic acquisition opportunities. It also affords us the flexibility to return cash to shareholders such as through our share repurchase program.

I will conclude my remarks with a few comments on our general outlook.

As we've discussed in the past, we believe that our core CMP business is unit based and driven by overall wafer starts.

Examining our revenues in each of the three months of the fourth fiscal quarter, sales activity remained relatively constant throughout the quarter and generally consistent with our sales levels in May and June.

As we observe orders for our CMP product received to date in October that we expect to ship by the end of the month, we see October results trending generally in line with the fourth quarter of fiscal 2007. 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.

I would also like to remind you that since the Asian foundries represent a significant portion of our business, there has been a strong historical correlation between our revenue and that of the foundries.

Although 2007 has been a challenging year for the semiconductor industry, certain industry analysts are predicting a stronger industry environment in 2008. Having said that, we remain cautious given the historical volatility of the industry and limited visibility into downstream end use demand.

Given our strong gross profit percentage performance in fiscal 2007, our full fiscal year 2008 guidance remains unchanged from fiscal 2007, which is 46 to 48% of revenue. The guidance is for the full fiscal year and quarter to quarter our gross profit percentage may be above or below this range.

As for operating expenses, we plan to continue our commitment to managing costs and therefore we expect our quarterly operating expenses to remain within the $27 to $30 million range for the coming year. This is also unchanged from our guidance for fiscal 2007.

Our full year tax rate is expected to be approximately 32% during fiscal 2008.

Capital spending should be around $20 million, but reflects our anticipated investment in the 300mm polishing tool and the associated metrology equipment for the Asia/Pacific region that Bill discussed earlier.

Depreciation and amortization for fiscal 2008 should be approximately $25 million. Now, I will turn the call back to Danielle as we prepare to take your questions.

(Operator Instructions) Your first question will come from the line of Suresh Balaraman, please proceed.

Thanks. When you look at the CapEx that you will be spending on the pad program, will the profits from the pad offset the higher depreciation from the CapEx that you will be spending for 2008?

Our capital spending for the pad business is largely behind us, Suresh. In 2007 we established -- you recall we retrofitted an existing building to a pad manufacture facility here in the Chicago area in the U.S., and we also added some finishing capacity in Taiwan.

So really most of that capital spending is behind us, so we don't really expect a lot of incremental capital spending in 2008 to support pads.

I think -- I may have misunderstood the comment. You said a large chunk of the CapEx of the $20 million is going toward the metrology tool and other tools for the [ads lab].

Suresh, this is Bill. What we are doing is we are installing 300mm polishing capability in our laboratory in Geino-cho, Japan to compliment the 300mm polishing capability we have here in Aurora, Illinois.

It just gives us the opportunity to work with our customers in that part of the world realtime. That's different from our investment in our pad business which I think Bill explained pretty well.

We spent the bulk of the capital in 2007 to get our pad line in place. Any capital going forward would be small and what I would describe as incremental. And not significant in our overall capital spent.

The big project that I spoke about in my scripted comments was a new 300mm tool and the associated metrology for our laboratory in Japan.

Okay, great. And of the eight customers, you talked about, how many of them would be using yours for the majority of their needs for at least one fab? By which I would mean at least maybe 10 to 12,000 wafers a month kind of number?

Suresh, right now the eight customers -- the penetration of those eight customers is quite limited. In fact, we are still talking about customer adoptions, not pad revenue.

When you talk about the level of consumption that you are describing, significant usage in a particular fab, we would be well beyond the revenue levels that we are talking about right now.

So far the eight customers we have, we penetrated in an application in a location. But admittedly the consumption is still quite small -- we hope that it will ramp with these customers and we'll gain additional adoptions, but it is pretty limited right now.

But Suresh, let me just add, I think, we were too optimistic in how long it would take us to penetrate many of these accounts and -- It's not really the penetration rate, it's the qualification rate.

Our customers are very cautious when they switch pad technologies and they go through the very lengthy qualification processes, sort of tool by tool and that's taken us longer than we expected.

I think what we are excited about is we see our pads going across all application areas, tungsten, copper, dielectric, logic, memory, foundry, it's independent of the tools that the customers are using, but we are excited by that and we are excited to see the kind of interest and pull from the customers, but it is taking us longer than what we thought to get to what I would call is material revenue from pad sales.

In addition, Suresh, one of the things that we are most excited about in this quarter's announcement is the most recent customer as we mentioned is using our pad for 300mm application in copper at 65 Nanometers. So whereas our focus up to now has been mostly around displacing an incumbent on an existing commercialized process, this latest customer represents really penetrating the leading edge of technology and that's pretty exciting for us.

And what drove the copper revenues and copper slurry revenues, it seems like a huge jump. Is it like an inventory buildup of some customer?

Well, I think if you remember what last quarter, Q3, you know we saw significant run-up in our tungsten and dielectric business, and copper didn't move so much. And this quarter we saw just the opposite, our copper business was up 14.7% and our tungsten and ILD businesses were up about 2 or 3%. I think it's just what we see as the normal order cycle, quarter to quarter, in each of the different application areas, Suresh.

Great. Thanks, guys.

Thanks Suresh. We will take our next caller, please.

Your next question will come from the line of Chris Lancet with J.P. Morgan Securities.

Hi, guys. Thanks. Kind of going back on the pads biz, of your eight customers, how many of those would you consider would be tier one semi device makers?

I'm not sure we've disclosed that. I think the only customer we talked about is Freescale, earlier in the year or in the middle of last year. I would say that we are -- of the 20, Chris, and the eight, that's a lot of customers and within that mix of customers you could well imagine that we have some tier one customers that are working to qualify our pad. You know we typically don't talk about customers and where --

I was trying to see how many of them are leading customers versus Freescale, which has kind of fallen off a little bit.

I understand the question.

Chris, with respect to the application we just announced, the 300-millimeter at 65-nanometer, there aren't too many semiconductor manufactures playing at that leading technology node. So you might draw an inference from that.

And you know they are all tier one, at that node.

Right.

Now a couple things here. You have kind of had a second really good quarter for tungsten slurry sales. Is there some change in the dynamics of the market? Or in your position that's leading to these really strong tungsten slurry sales? Or are you also seeing record sales in the other ones as well and you're just not quite identifying that or pulling that out?

Well, you know tungsten is a -- a couple things about our tungsten business. We enjoy a very strong position in tungsten CMP slurries. We have a great product line that has been very robust over many years. And I think what we are seeing is the emerging importance of the memory business. And the increased wafer starts as a percentage of the total wafer starts for memory devices and the incorporation of our tungsten CMP slurry in the manufacturing of those devices. So if there is a macro swing, it's the increasing percentage of the total wafer starts that are memory starts versus logic starts, and then the use of tungsten CMP in those applications I think is perhaps driving some of that tungsten sales.

And then I guess are you willing to kind provide what kind of revenue levels you are receiving from pads for the quarter? Are we talking still under $5 million or so?

We haven't broken it out because again it's still really not material. So it's still very small. So we are still counting customer adoptions rather than talking about revenue at this point.

Along those lines, if you like say for the 65-nanometer copper customer, if you use a base line fab, what kind of revenue generation on an annual basis would you potentially expect to receive from each of these customers? Is there some ballpark?

We have -- we have installed the capacity to significantly capture, not significantly, but capture a very large portion of the margin -- the current market. Sort of a double digit position in the current market. So we are ready to go from a capacity point of view. I think depending on -- you know this Chris, depending on the size of the customer and size of the fab and the number of wafers they are pushing in the front end, I think any one of these customers could be a $10 million account, maybe more.

Okay.

But that's hard to say. Again, I want to come back to what I said earlier. It's taken us longer than we anticipated when we started. We are not unhappy about where we are, I think we are always a little overly optimistic about how fast we can get a new product in the market and this is the same case. We certainly are certainly seeing customer pull for this pad.

One last question from me. Your SG&A costs were up on the quarter. Was that partly due to the closure of the Wales facility and some expenses tied to that?

Yeah, it really was not -- The closure of the Barry facility will have kind of an immaterial impact in '08 in terms of additional costs, but really no incremental costs in the current quarter. Then we expect to save some amount of cost in '09 and beyond. Really, the biggest driver of the higher operating expenses was the additional accrual of the incentive compensation program that we mentioned during the comments.

Thanks, guys. Appreciate it.

We will take our next caller, please.

Your next question will come from the line of Dmitry Silversteyn with Longbow Research. Please proceed.

Good morning, guys. Couple of questions, well more than a couple questions but hopefully we can get through them. To get back to the Barry, Wales closure. Do you expect to take any sort of a charge for this closure, and when do you expect to take it if that's the case, and roughly what the magnitude would be.

No, we don't. We will have some additional costs that will run through probably the first several quarters of 2008. What we are doing is transitioning the production from the Barry facility to our other plants over the 6 to 9 month period.

What we do is essentially depreciate the remaining assets over that period, so we will have a little accelerated depreciation during that period. The plant is small enough and the asset base is relatively low so I don't think that will be visible to you quarter by quarter. It's really immaterial. Then following that transition, we expect again a modestly lower level of manufacturing costs after we've completed that transition.

But again, it will be -- it's not material and really not very visible quarter to quarter probably. This is all just about optimizing our system so not really dramatic, but I think it demonstrates attention to cost and productivity.

And the professional fees you referred to several times in your prepared remarks which were both part of the higher G&A this quarter and I believe has been a case periodically throughout the year or maybe a bit longer. Is this associated with some of the patent defence that you guys are undertaking on a continuing basis or is there something else that you are paying consultant for here?

That's correct. As we talked about in the foreward, we are defending several of our patents in tungsten CMP and we will continue to do that as long as we need to. As you know, we are always aggressive in enforcing our IP around the world and will continue to be.

Fair enough. Getting -- switching to the pad business, the ramp at existing customers which I don't know if it's more likely than getting new customers or not, but what is that dependent on? What are the kind of the milestones that you have to meet with your current one-line and one-fab type of sale to have the customers adopt your product more broadly in the seven customers you have been in for a while.

What we see happening, Dmitry, is the customer will begin to work with our pad in sort of a laboratory basis or an experimental basis, and if they see results that are consistent with the results we supply them from our laboratories here and off our CMP polishing tools here, they will take that pad into production, typically on one CMP tool.

What they will do is they will measure their normal sort of measurements from a CMP process point of view, defects, polar moiety, all the sorts of things we are very familiar with, but they will take those wafers all the way through to electrical testing and make sure that the yields on the tool are consistent or better than the yields that they got prior to switching the pad.

Once they are convinced they have that performance on one tool, they move to another tool and another tool. So it's a very incremental process they go through or serial process they go through that's taken us a lot longer than we thought.

Once the customer is convinced that the performance is what we claim it to be and that performance is longer pad life at equivalent or better performance, they move very quickly to bring the pad into the fab and incorporate it across the line. But again, that has taken longer than we expected.

We think we are hitting a point now where we think we are sitting in front of a pretty rapid ramp and we are excited about it.

So the first couple of customers you have been in with since September of last year, you feel are getting ready to implement your pad technology a little bit broader across their fabs?

I think we were close, Dmitry.

Okay. The one pad customer you talked about today was in copper at 65-nanometer and 300mm wafers. What were the previous seven at?

The previous seven were at a range of I think more concentrated around 200-millimeter and oxide and dielectric. This is the first copper application.

So they were on older technology both in terms of the wafers and in terms of material polished.

I think that's correct. I think this is the first 300-millimeter but I'm not positive.

The gross margin increase in the quarter, which was very nice to see, how much of it was driven by the fact that tungsten was strong, and copper, and how much was it new product gaining traction, and how much was volume in general?

I guess I'm just trying to understand the pieces that went into this very strong performance sequentially, as well as year-over-year.

The biggest impact was around capacity utilization and just volume. There is a modest mix effect that was relatively minor. It was mainly the capacity utilization and volume.

So if I extrapolate that and look at 2000 -- the December quarter probably being let's say roughly flat, and 2008 overall being stronger, is there reason to expect margin -- gross margins to fall back to the low end of your range versus staying the high end of your range?

I think in a macro level, Dmitry, we are beginning to see the results of the two strategies I talked about earlier, technology leadership and operations excellence.

As we saw our [ASPs] begin to stabilize and increase this fiscal year, in addition with the productivity enhancements we are getting on the cost side, I think we are very comfortable with our guidance of 46 to 48% through 2008. Where we come out in that range, I don't think I am going to speculate on that.

But we certainly see plenty of opportunities on the productivity side to continue to further reduce costs and see plenty of opportunities on the technology leadership side to introduce new products that maintain our current margin structure.

Okay, fair enough.

Thanks, Dmitry. We will take our next caller, please.

Your next question comes from the line of Colin McArdle of Needham & Company. Please proceed.

Good morning guys, thank you for taking my question. I was wondering if you could expand a little bit on the downside in the ESF and what were the factors there and what your expectations for QED are for this year.

Well, I think we would ask you to focus on the annual results of QED and not the quarterly fluctuations.

When we acquired the company I think we said early on that we would expect the revenues to be lumpy. Not a scientific word, but lumpy. This company sells equipment and they sell machines in the quarter and the number of machines drives revenue.

If you remember in Q4, our last quarter, Q3 of this year, they had a record quarter, $6 million quarter. And we fully expected that to fall off this quarter and it did. And so I think we can expect volatility in the QED revenue going forward.

However, we are delighted with that acquisition. We think it was a smart acquisition and is very successful in terms of integration and where we sit today and we think that business has great prospects going forward as well as the advantage of beginning to think about combining some of their technology with our technology to go after some other markets that offer us opportunities.

Colin, if you look at the full year for FY '07, QED did $18 million in revenue and this was around 40% higher than in the four quarters before we purchased. It was around $13 million there.

We don't provide revenue guidance, but we did -- the expectation when we bought the company was it would be a vehicle for growth, and certainly in the first year we have been very happy with the performance.

Sure, fair enough. And if I were to combine that with data you earned 10% of your revenue was coming from non-semiconductor. Do you expect that to change in this fiscal year and what would be drivers for that?

Well we've -- in the last year we have done what we consider are two successful acquisitions, albeit they were small acquisitions. We continue to be interested in M&A as a vehicle for growth, both within our space, but within the CMP space if there is a consolidation opportunity we would certainly be interested in it. As well as in our ESF initiative to help us sort of diversify our markets as well as our product portfolio. So that's one avenue where we might see additional revenue contribution in this current or this ongoing year. But we also have growth plans within the ESF initiative for both the organic growth and QED growth. So I would expect that number to go up as time goes on and we fulfill our expectations and our ESF initiative.

Okay, thank you. And in terms of guidance, you obviously cited the core business being very sensitive to wafer starts. Do you have internal expectations of if wafer starts are X, your growth being 1.5x or, is there anything you can do to put some additional detail on that?

We don't do that. We certainly have our internal metrics and measures, however, I think we have been trying to explain in several quarters, at least several years now that we don't expect CMP revenue growth to keep up with unit growth for a whole bunch of reasons that have to do with some the things I mentioned in my earlier comments about providing lower cost of use, lower cost of ownership solutions to our customers, dilution, the transition from 200 to 300mm wafers. So we don't talk in terms of multiples of wafer starts. We are more focused on trying to understand where the growth is, where the opportunities are and where the customers are going with new technologies.

Okay, thank you.

Thanks, Colin. Danielle, we will take one more caller, please.

Yes, Ma'am. Your next question is from the line of Steve O'Rourke with Deutsche Banc. Please proceed.

Thank you, good morning. You talked a bit about business levels on a monthly basis extending into October. Can you comment on customer inventory levels of slurry or any trends you are seeing there?

Steve, it's Bill Johnson. We have not -- I don't think we have seen any recent trends. We maintain some limited amount of inventory and our customers maintain pretty limited amounts of inventory. I don't think we have identified any variance in slurry inventory. It seems like the bigger effect on our business and demand for our products is sort of device inventory, and quite a few people that look that the. But in terms of slurry inventory and trends, I don't think we have seen any change over the last several month.

And you talk a bit about slurry prices stabilizing, and actually increasing here. What's the dynamic here and is it sustainable when you look out into '08?

You know, we think -- you guys know this. Over the last three years we have seen a lot of competitors enter this market or attempt to enter the market. And many of them attempted to enter with the proposition of lower cost or lower pricing. We think the number of new entrants has stabilized and that we don't see the flock of people that were flying into the market that we saw three years ago. We don't see that any more and we think the number of competitors has somewhat stabilized.

We also think that there is a point in this business where the customers we serve are hugely demanding and to get a business to be successful and sustainable over the long-term, you have to have the quality systems and the technology and the service and support to serve this industry and that costs money. At some point we all need to get paid for that and we expect to get paid for it and I would expect that our competitors expect to get paid for it. So we are -- I guess we are comfortable with where we sit today.

We are excited about some of the new product offerings that we are bringing to the market that are focused on lower costs.

I want to caution again some of these products and some the new offerings, they will reduce the total [TAM] or the total growth of the total TAM and I think people need to get that in their minds and model as we go forward.

It sounds like what you are kind of saying is that we should expect some pricing strength compared to history, based upon the dynamic that you are seeing among the competitive situation. Is that fair?

I would describe it as stability.

And one last question. Can you continue with 6% annual productivity improvement, do you think?

Yeah, I think there is opportunities, Steve. I think beyond just what I would describe the normal sort of cost optimization, we are also looking at some process technology that we think can change the nature of our cost structure to manufacture CMP slurries. So that's an opportunity we haven't talked about yet before within the productivity -- what we call our productivity deck. That's a different approach from a process technology point of view. We think there is probably 4, 5 or 6% every year that we can go after and find. The Six Sigma project we started a couple of years ago has definitely begun to pay off for us. We have a large percentage of the company now is trained as green belts and we have several black belts. I know there is a lot of jargon and lingo that goes around Six Sigma, but we are really incorporating and using here at CCMP and it's helping and we were seeing result. I know there is a lot of jargon and lingo that goes around six Sigma but we were incorporating and using here at CCMP and it's helping and we were seeing real results.

And one last question. You talked a bit about potential future acquisitions, without a whole lot of detail and you have the balance sheet to support. Is there anything out there now that you are looking at closely that might make sense. Should we be expecting acquisitions in the not too distant future from you.

We talk a lot about it, Steve, and I think what we are trying to do is be as smart and disciplined as we can about our M&A strategy and not wander too far afield from what we think we a re really good at. You know we made the two that you are aware of. We think they are smart, and as I said earlier we think they are very successful. But they were small. And we continue to look at certain M&A activity and certain opportunities out there that we think could add value to Cabot Microelectronics. But more importantly where we think we can add value to their business and combine the two to do something exciting by combining our CMP technology and different applications. But there are not that many when you sort of take that kind of focus. There is not that many properties that are out there and then are those properties actionable is a whole other question. And I think that's why we are perhaps moving slower than you might like us to. But that's our approach and that's how we are going to --

Okay, thank you very much.

Thank you, Steve. Thank you for your time this morning and your interest in Cabot Microelectronics. We look forward to the next opportunity to speak with you. Good-bye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your presentation. You may now disconnect and have a great day.