CMC Materials, Inc. (CCMP) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Cabot Microelectronics earnings conference call. My name is Eric, I will be your audio coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate the question-and-answer the session at the end of the presentation. (Operator Instructions) I would now like to turn your presentation over to Ms. Amy Ford, Director of Investor Relations. Please proceed.

Good morning. With me today are Bill Noglows, Chairman and CEO and Bill Johnson, Chief Financial Officer. This morning we reported results for our second quarter of fiscal year 2009 which ended March 31. Our announced results this morning follow our press release on April 14 in which we discuss certain preliminary results. Copies of these press releases are 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 will be archived for four weeks on our website. The script of this morning's formal conference 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 Form 10-Q for the first quarter of fiscal 2009 ended December 31, 2008 and Form 10-K for the fiscal year ended December 30, 2008. We assume 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 thanks for joining us. This morning we announced financial results for our second quarter of fiscal 2009 which we believe reflect the continued effect of the global recession on our business. We reported revenue of $45.4 million which represented a more than 50% decline from the same quarter last year. As a result of the unprecedented low level of demand for our products, our gross profit percentage was adversely impacted by the significant under utilization of our manufacturing capacity during the quarter. Additionally, we recorded several specific expense items totaling $3.6 million which added to our operating expenses this quarter. As a result, we reported a net loss of $10.1 million for the quarter. However, even during this challenging period, we generated positive cash flow from operations during the second fiscal quarter and for the fiscal year to date. In addition, we ended the quarter with a healthy cash balance of $159 million and no debt even after our cash purchase of Epoch Material Company in February for $66 million.

We believe the Company's financial performance in the second fiscal quarter is consistent with the weak economic environment. However, we are encouraged by recent signs of an upturn in our business. Following the low revenue levels of January and February, we saw a marked increase in demand for our products in March and orders to date in April are tracking significantly higher than in the same period in March. We are hopeful that this recent upturn may indicate that the worst is behind us and that we are seeing the start of a recovery. Based on some industry reports, it appears that a major correction of excess semiconductor device inventory occurred over the past two quarters. With semiconductor inventory adjustments expected to be completed in the first half of calendar 2009 and assuming the traditional seasonal strength in demand in the second half of the year, some industry analysts expect IC device demand will accelerate in the second half of this calendar year. Additionally, some more than $2 trillion in worldwide economic stimulus could prove to be a positive growth driver for the global economy over the next two years, including the demand for electronics. There are already positive signs of increased demand in electronic stemming from China's adoption of 3G technology. While we hope that the growth forecasted by some industry reports materializes in the near term, we know that limited visibility into the semiconductor industry and the global economy makes it too early to predict a recovery with any certainty. Given this lack of visibility, we continue to manage our business with a focus on cost management and cash flow.

In the December quarter, we implemented cost reduction initiatives to better align our costs with the declining demand for our products we began to experience at that time. For example, we implemented shorter work schedules in our production operations, a hiring freeze and reduced discretionary spending. In response to the continued industry downturn and the opportunity to realize synergies and leverage resources through our acquisition of Epoch, we implemented additional cost reduction measures during the second quarter, including a modest reduction in force. Within the last two months, we saw demand for our products increase and we quickly increased work schedules in our manufacturing operations to meet demand. As a result of our focused cost reduction efforts and our ability to respond quickly to changing industry conditions, we achieved significant savings across our business in the second quarter without compromising our operations, quality or intellectual capital. Despite the adverse economic and industry climate, our financial flexibility allows us to continue to invest in our company and execute on our primary strategy of strengthening and growing our core CMP consumables business while at the same time continuing our efforts to leverage our CMP technology into new applications and industries through our engineered surface finishes business.

Our recently completed acquisition of Epoch allows us to strengthen and grow our core CMP consumables business. As semiconductor technology becomes more complex and the cost of developing leading edge products and supporting our customers' increases, we believe the benefits of scale become more important. The Epoch business adds to our scale, particularly in Taiwan, the world's largest geographic market for CMP consumables and also expands or copper product portfolio. Now that the transaction is closed, we are working to effectively integrate our two businesses and leverage the natural synergies. For example, we recently implemented a reorganization of our research and development function as part of our technology leadership initiative designed to capitalize on new capabilities and opportunities in Taiwan and to better leverage the strengths within our overall R&D team. Our Epoch acquisition also supports our key initiative of connecting with customers. We have been working toward shifting more of our business resources to the Asia/Pacific region to increase the proximity to our significant customer base there. By acquiring Epoch, a Taiwan based business, not only have we partnered with a company that has existing strong customer relationships, but we have also significantly increased our physical assets in this very important region.

Today, approximately 50% of our employees and fixed assess base is located in the Asia/Pacific region which is a significant increase from five years ago when only 25% of our employees and fixed asset base were located in the region. By positioning ourselves physically closer to our customers in the Asia/Pacific region, we expect to increase our ability to better serve and collaborate with them on a comparable level to our customers in the US. We also aim to strengthen and grow our core CMP consumables business through internal development efforts. We believe our CMP pad business represents the company's strongest internal growth opportunity since pads represents a large adjacent business area to our core CMP slurry business. By expanding our product portfolio into this adjacent area, we effectively increased our total addressable market by over 70%. We have steadily grown our pad customer base over the past two years across a wide range of polishing applications, technology nodes and polishing tools, and we are pleased to report that we gained two new pad customers this quarter and one new application with an existing customer. Additionally, we made significant progress in improving our pad manufacturing yields. Through operations excellence efforts, our pad team exceeded the targets we established last year and we are continuing to pursue additional yield improvements in fiscal 2009. We also completed the installation of our on site pad finishing capability at TSMC and achieved ISO9001 certification for this facility in our second fiscal quarter. This pad capacity was installed on schedule and fully operational in less than six months. We believe this is an important milestone in our pad business, potentially driving increased customer engagement and reducing logistics costs.

In summary, we remain confident in the long term strength of our business despite the negative impact from the current economic downturn. Recall that we are primarily a units driven consumables company, so our business is quick to respond to increased production of IC devices by our customers. Unlike some other players in the industry, for us, this downturn is not a question of survival. It is a question of prudently seeking and leveraging opportunities as well as executing on our strategies to further strengthen our business. We believe that our acquisition of Epoch and our installation of on site pad finishing capability at TSMC are excellent examples of Cabot Microelectronics seizing opportunities where others might not have the ability to do so. We were managing our business to optimize our performance during challenging industry and economic conditions. We believe that we have implemented an appropriate level of focused cost management initiatives in response to the current conditions. However, should the industry downturn prove to be more protracted, we are prepared to further adjust our costs and infrastructure. Overall, we hope that the recent upturn in our business continues and that we will benefit from improved economic and industry conditions as well as the addition of Epoch in the near future. With that, I will turn the call over to Bill Johnson. Bill?

Thanks, Bill, and good morning, everyone. Revenue for the second quarter of fiscal 2009 was $45.4 million, which was down by 52% from the second quarter of fiscal 2008 and down 28% from the previous quarter. Our reported revenue is consistent with the preliminary revenue we provided in our press release on April 14. We believe the decrease versus both previous periods reflects the impact of the economic global recession on electronics demand and inventory correction of excess semiconductor devices and traditional seasonal weakness. Revenue for each of our business areas declined year-over-year and sequentially, except revenue for our data storage slurry products which increased significantly from last quarter. Despite the sharp reduction in our revenue, the average selling price for our CMP slurries increased year-over-year and was even with the prior quarter.

Drilling down into revenue by business area, tungsten slurries contributed 42.1% of total quarterly revenue with revenue down 50.4% from the same quarter a year ago and down 26.7% sequentially. Sales of copper products represented 15.9% of our total revenue and decreased 45.5% from the same quarter last year and 18.6% sequentially. Included in this business is our barrier removal product line. Our barrier revenue decreased by 8.9% from the same quarter a year ago. Dielectric slurries provided 25.2% of our revenue this quarter with sales down 61.7% from the same quarter a year ago and down 41.5% sequentially. Data storage products represented 7.4% of our quarterly revenue. This revenue was down 12.1% from the same quarter last year and up 38.4% sequentially. The increase in revenue from the prior quarter was primarily driven by the ramp in demand from an important new customer win for this business that we mentioned last quarter. Sales of polishing pads represented 5.4% of our total revenue for the quarter and decreased 24.9% from the same quarter last year and 28.8% sequentially. Finally, revenue from our engineered surface finishes or ESF business which includes QED generated 3.9% of our total sales and our ESF revenue was down 68.6% from the same quarter last year and down 32.1% sequentially.

As primarily an equipment oriented business, our QED business is subject to capital equipment cycles and the current cycle has significantly adversely affected revenue in this area. Our gross profit this quarter represented 28% of revenue, which is consistent with the preliminary results we discussed in our release of April 14. The significantly lower gross profit percentage this quarter compared to 44.7% in the same quarter last year and 45.6% in the previous quarter primarily resulted from unprecedented under utilization of our manufacturing capacity. We are accustomed to operating in volatile demand environments and historically our relatively low fixed manufacturing costs have allowed us the flexibility to quickly change production levels while maintaining a mid-40% gross profit margin range such as we recorded last quarter. However, we have never experienced two back-to-back quarters of such significant revenue declines, and this was enough to materially impact our gross profit percentage for the quarter. Fundamentally, our business model has not changed. As Bill mentioned earlier, we recently began to see an increase in demand and we are hopeful the negative impact of the economic downturn will be relatively short lived.

Year-to-date, gross profit represents 38.2% of revenue. In light of our gross profit performance for the first half of the fiscal year, we no longer expect to achieve fiscal 2009 gross profit within our previous full year guidance range of 46% to 48% of revenue. 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 million this quarter included the negative impact of three specific items. First, a $1.5 million writeoff of in process research and development expenses related to our acquisition of Epoch which is subject to finalization of purchase accounting. Second, a $1.1 million impairment related to certain research and development equipment and third, a $1 million increase in our reserve for bad debt expense due to the impact of adverse economic conditions on customer collections, including customer bankruptcies. Excluding these specific items, operating expenses would have been $26.4 million in the second fiscal quarter.

On this basis of comparison, this represents an 18.1% reduction from the $32.2 million reported in the same quarter a year ago and a reduction of 10.3% from the $29.4 million reported in the prior quarter. Similarly, the decrease from both periods was primarily driven by lower staffing related costs, professional fees, including legal fees to enforce our intellectual property and travel expenses. Reflecting the closing of our acquisition of Epoch this quarter as well as additional actions we took this fiscal year to improve our operating effectiveness and capitalize on acquisition related synergies, we now anticipate our fiscal 2009 operating expenses to be in the range of $115 million to $120 million including the three specific items I described earlier. This is down from full fiscal year 2008 operating expenses of $125 million, which was a period of time during which we did not own Epoch. Diluted loss per share was $0.44 this quarter, down from earnings per share of $0.34 reported in the second quarter of fiscal 2008 and $0.01 last quarter, primarily due to the significantly lower level of revenue and accompanying lower gross profit percentage, both driven by the global economic downturn. The adverse specific operating expense items I described earlier accounted for approximately $0.10 of the diluted loss per share this quarter.

Turning now to cash and balance sheet related items. capital additions for the quarter were $2.3 million, depreciation and amortization expense was $6.1 million and share based compensation expense was $2.9 million. Reflecting our acquisition of Epoch in February, we ended the quarter with a healthy cash balance of $159 million and no debt outstanding. Despite reporting a net loss, we generated positive cash flow from operations during the quarter and fiscal year to date. Due to our strong cash generating business model and solid balance sheet, we have the flexibility to continue to focus on strengthening our business during the current downturn while other companies in our industry may be struggling just to survive.

I will conclude my remarks with a few comments on our general outlook. As we have discussed, looking at our revenue pattern during the three months of the second fiscal quarter, we saw a continued softening and demand for our CMP consumables products in January and February with revenue in each of these months of only $13 million to $14 million. However, in March, we experienced a marked increase in demand and we recorded monthly revenue of $18.5 million, approximately 40% higher than in January and February. As we observe our orders for our CMP consumables products received to date in April that we expect to ship by the end of the month, we see April results trending significantly higher than in the same period in March. We are encouraged by the recent uptick in demand for our products, 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. Now I will turn the call back to the operator as we prepare to take your questions.

Thank you. (Operator Instructions) Your first question comes from Avinash Kant with DA Davidson & Company. Plead proceed.

Good morning. Just a few questions. Bill, when you talk about things improving significantly in the month of April, do you mean on 40% increase as you saw in the month of March?

I would rather not describe it in terms of particular percentage increase, because it does represent such a limited early look at the quarter. But when we look at the first three weeks of orders, the month of April compared to March, the increase is significant. I don't think I want to characterize it any further than that.

Okay, and in terms of the pads business, of course you have been seeing new customers and new business there. Of course, right now things are tough. But how do you see that coming along in the next year or two?

Well, I think in this period that we have been living with in the last two quarters, Avinash, our pad team has not missed a beat. They've been hitting on all four cylinders. They have been working and executing on the plans we established two years ago, and they involve more customer qualifications, working on our productivity and yield improvements, developing and introducing a next generation pad technology and completing the build and the infrastructure buildout at TSMC. Those things have gone exceptionally well, many of which we executed ahead of schedule. So we continue to be bullish about our pad opportunity and our pad technology and the value we bring our customers, and we think that we will continue to see the kind of growth we have seen earlier in the -- prior to the downturn. Again, we are excited. Clearly our pad and our pad technology has been validated in the marketplace, and we see more and more interest around the world to get our pad technology into fabs and get them qualified.

Also Avinash, to date, all of our sales and promotional effort has been around a single product, the D-100 product. We are working on our next generation pads. With the time frame you described, we would expect a sampling introduction and commercialization and revenue from that next generation pad as well.

Now, on a broader business perspective, you have of course, a significant exposure to foundries. At this point, from what you are hearing from them, what's the qualitative direction that they are showing, at least in their planning stages in terms of the rest of the year if you were to qualitatively talk about how the quarters are looking? Are they planning for a sequential uptick all through the rest of the year?

Well, we have seen an uptick. I was on the phone last night with the gentlemen that runs our Taiwan operation, and he told me he estimates that the large foundries are running at about 80% of capacity, which is far better than they were a quarter ago at 50%. I think that we are all being cautious. I think our customers are being cautious. We are all expecting and waiting to see what happens in the third calendar quarter, which is traditional, very strong seasonal quarter for the semiconductor industry related to the back to school build and the pre-holiday build. I think it's too early for us to sort of give you a forward view. We have as limited a visibility as many of our customers, but we are optimistic, given the upturn in demand we have seen, and certainly in March and then again this month in April. But I think it's very difficult for a company like ours to predict what will happen in the third and fourth quarter -- calendar quarter, because I think it's difficult for many of our customers to predict what demand will be in light of the economic situation around the world.

Okay. And a few quick housekeeping. Could you give us the goodwill and other intangible number in your balance sheet?

I don't have that on the balance sheet. If you compare balance sheet quarter-to-quarter, you saw a big increase in other long term assets, and most of that is increase is attributable to goodwill and intangible assets associated with the Epoch acquisition. I think the total there was around $45 million or so. In addition, there is some restricted cash in other assets that makes up most of the rest of that. We will have more visibility on that when we issue the Q, though.

So the other assets line that has gone up is primarily because of goodwill?

It's mainly related to purchase accounting on the Epoch acquisition. That's right.

Okay. I was hoping to get that number because it will help me figure out the tangible book for you. But if you didn't have that, we can talk later --

The best number I have is around $44 million. That's the increase in tangible -- intangible assets and goodwill related to Epoch.

So $44 million is the increase in intangible goodwill?

That's right.

Okay. That's a good number. And it looks like all the charges you took mostly came from R&D. Can you break that down, the $3.6 million into cost, R&D and SG&A?

I can't. I can tell though, you it's all operating expense. Let's see, the bad debt expense increase will hit administrative, the equipment writeoff is R&D and the in process research and development is R&D, but I think we sometimes show that in another line item, just not to confuse it with ongoing R&D efforts.

Right, right. So the two line items in R&D looks like the 1.5 and 1.1

1.1, that's right.

And the 1 million would go into --

G&A.

G&A, right. Okay. And what was the headcount at the end of the quarter?

Approximately 900, and that reflects the addition of Epoch employees.

Thank you so much, thanks.

Thanks, Avinash. We will go ahead and take our next caller, please.

Your next question comes from the line of Dmitry Silversteyn with Longbow. Please proceed.

Good morning guys. A couple of questions, if I may. On the Epoch acquisition, I just want to revisit that for a second. You talked about acquiring a good asset structure in Taiwan and picking up some customers in the copper slurry business. Is that kind of what the driver for the acquisition was? There was nothing in terms of technology or a toolbox that you picked up from this that can somehow help you with your intellectual property or product development going forward? This was just a geographic acquisition, if you will, as well as the market share acquisition? Is that the right way of looking at it?

Yes and then some, Dmitry. We consider the Epoch acquisition highly strategic. There's -- of our CMP competitors today, there are a handful of them that we believe are really great suppliers that are profitable companies with sustainable business models. Epoch was one of them. We have been talking about extending our manufacturing capacity into southeast Asia for many sort of several years now. Epoch gave us an opportunity, quickly established a manufacturing and R&D footprint in Taiwan. Where as you know, it's our -- it's kind of the largest market we serve in the world today. They have some unique products that fill out our copper portfolio of products for copper CMP technology. They have some terrific people on the R&D side. They are a very capable operating company, and they have some very strong relationships with customers in southeast Asia. So it kind of covers all of the ground of our strategy around operations excellence, technology, leadership and getting closer to customers. It's a great fit for our company.

Excellent, Bill. Thank you for that color. Last quarter you talked about your SG&A expense being largely fixed, and then you proceeded to lower it excluding Epoch by $6 million plus yield, so kudos on that. My question is twofold. Number one, this is level of expense sustainable longer term beyond kind of like emergency actions that you are taking right now to try to -- to husband some cash and reduce some costs? And secondly, can you remind us how -- what variable versus fixed mix is in your cost to goods sold line?

First with respect to operating expense, as we have talked about, our focus in managing costs, operating expenses, this environment has been to try to manage around discretionary type expenses and not implement significant layoffs. And the idea being that we are not a real capital intensive business, we are a more intellectually intensive business. So we've put together a strong team of employees with experience and capabilities that are really important to the business and will be important when the industry turns up. So we focused on things like a hiring freeze, restrictions on travel, suspension of employee benefits, reduced annual merit increase on employee salaries and a limited reduction in force, among some other things. Some of those we would -- in an upturn we would turn back on, certainly the suspension of some employee benefits, that's a temporary thing. The travel restrictions, we have not restricted travel to customers. And some of that may -- could be sustained. But it's always our plan to try to grow -- limit the growth and operating expenses to a rate significantly below the growth rate on revenue, and that would be our strategy going forward, coming out of the downturn.

Okay. All right, great.

With respect to the cost to goods sold, we have variable semi-variable, semi-fixed and fixed costs. And so I'm not really able to split that out in any detail. But I'd just characterize our costs as sort of limited on the fixed costs, but I can't give you any more specificity than that, I'm sorry.

That's okay, Bill. You talk about lower legal fees as least one of the drivers of year-over-year decline in operating expenses. Can you give us an idea what the magnitude there is? Are we were talking about under a million? Over a million in terms of year-over-year difference in legal fees?

No, I wouldn't be able to be that specific there, but it was lower both year-over-year and sequentially. Our IP litigation continues and we will see volatility in that, depending how the case proceeds. But I couldn't give you a lot more color other than we try to call out sort of the significant items, and that was one of the items we called out.

Okay. I think last quarter -- this is my last question. I think last quarter you mentioned that bad business was break even on the gross margin line. Given the 25% or so decline in performance in volume of that business, is it fair to assume you lost the money on a gross margin line in the pad business?

I think that's fair to assume, given the downturn in demand for the pads, Dmitry.

Okay, would you care to comment how much or what the gross margin would have been in ex-pad business, I guess?

It had about a 3%, 3.5% drag in gross profit margin overall.

Okay, that helps. Thank you, guys.

Thank you.

We will take our next caller, please.

Your next caller comes from the line of John Roberts with Buckingham. Please proceed.

Good morning.

Good morning, John.

Is it fair to say there is not much inventory cycle effect between you and the fabs, given the switch to direct distribution in much of Asia a couple years ago? Or is some of this resurgence in demand possibly some inventory stocking?

I think it's fair to say that we are quicker to respond to customer demand than we were prior to our going to direct in Taiwan. We still use some distributors in some locations around the world, but I think we have more visibility now into rapid pick up in demand than we had prior when we had distributors between us and the customers, John. I would say I think clearly some of our customers are refilling their supply chains, and we are trying to refill our supply chains as well and get the system back working again sort of at a status quo level. I think the question for us all is what is the new normal and what is the new status quo? As we said in our release, we are bringing our staffs back in the operating side of our company. Our plants in Japan and here in North America are running pretty hard right now relative to where they were in January and February. So we feel -- as we said in our prepared comments, we feel excited about the pick up in demand in March and April, and we will see where it goes.

There is a little bit more data that might be helpful, John. One indication of sort of the close linkage to our revenue and our customers' operations, and we talked about this in the past, there's a historically quite a strong correlation between our revenue and the reported monthly revenue of UMC and TSMC, and if you look at the last four or five or six months, I think we really have really been quite closely corelated to those, which will indicate not much in the chain. The only place where I think we see -- we still have distribution of any amount is in China, and we do see some some wider swings in revenue, periodic revenue there based on the inventory that might be held by the distributor.

Secondly, the on site pad finishing at TSMC is an pretty interesting model. Can you tell us -- I should know this, but I don't. Does Roman Haas follow a similar model with their pads, or they don't really require the finishing and customization that yours do?

I can't really comment on Roman Haas, John. I would comment that from our perspective and our view, we saw it as a terrific opportunity to reinforce our value proposition with that customer and give -- provide them the ability to do custom tailored grooving on site in situ realtime for those fabs within that system. We just think it's -- strategically, it's a great move for our company and it positions us really well in Taiwan and the Taiwanese market, and it give us -- hopefully it will give us some enhanced ability to collaborate and look for opportunities to reduce costs within the supply chain and better serve that customer. So we are really excited about the opportunity to do this. I don't think it's a model where we made a decision or a judgment about a centralized grooving facility or satellite grooving facility. We saw an opportunity to partner with one of our largest customers and do something really unique in the supply chain, and that's why we did it.

Is there an opportunity to do something similar in tuning of the slurries? You have already gone down this tunable slurry model, but it's still done centralized. I don't know whether the customer specific requirements would justify anything done locally?

Clearly, some -- an acquisition like Epoch gives us the ability to do that just that in Taiwan for our Taiwanese customers and some of our southeast Asian customers. It gives us another site and another piece of infrastructure to get closer to our customers and cause us to be more responsive and more flexible in meeting the demands of those customers. So I think -- again, I think the Epoch acquisition is a fantastic opportunity for our company to put us in a position to be much more flexible and responsive to customer needs and much more proactive in meeting those demands going forward.

Thank you.

Thanks, John. We will go ahead and take our next caller, please.

Next question comes from the line of Peter Kim with Deutsche Bank. Please proceed.

Hi, thanks for taking my question. I was wondering, would you specify how much contribution you got from the Epoch acquisition in this quarter?

Well Peter, remember, this quarter only included one month of revenue from the Epoch acquisition. I don't think this quarter is going to be a representative quarter, and I would rather not give any more color than that. I think if you remember when we announced the transaction, we estimated the revenue to be about $28 million in 2008, and we would expect that kind of revenue on the normal basis going forward. Net of any incremental sort of value we get by combining our R&D and product portfolio with their product portfolio. We hope to grow this business and not just maintain it. I think that's the best number we can provide, is what we provided when we announced the transaction.

And then you would expect -- the Epoch business is subject to the same industry conditions that we are. So our sales are down significantly in fiscal year '09 due to the industry, and they are seeing the similar occurrence.

The Epoch contributions would all fall under the copper category, though. Would that be accurate?

Yes, that's correct. Let me just clarify a little bit. They do have a little bit of revenue in a couple of other business areas that may have an impact on our ESF business. But really, the vast majority of their sales would be in the copper area.

I noticed that there was a distinct drop in the oxide revenue this quarter. I was wondering, is that a reflection of some of the memory capacity maybe not really buying back in the comparable rate as your other customer base?

We are a little struck by that ourselves. Ordinarily, you will expect dielectrics and tungsten to move somewhat in tandem, because they are both pretty heavily used in memory, and the downturn in dielectrics was more pronounced, and we really can just attribute that to product mix, customer mix and the pattern of orders. We don't believe we've lost any share. We think it was sort of some volatility in the environment.

Okay. Lastly, I was wondering, you talked earlier about how your customers are building up their supply chain. I was wondering if you have visibility into the amount of inventory that they would maintain for the slurries and whether or not the recovery that you are seeing in April and -- March and April, what percentage of that might have been to replenish the inventory that they depleted during the shut down period?

Peter, I don't think we have an accurate view of how much of the increased demand is restocking and how much is actually driven by wafer starts and CMP passes. We'll have a better -- I think we will have much more visibility when we talk to you next quarter.

The model is to be pretty responsive to customers. So our view is they don't hold a lot of inventory, that we tend to try to supply them in real time and so just as I mentioned to the answer to John Roberts' question, we see a really pretty strong correlation to our monthly revenue and the reported monthly revenue of TSMC and UMC, so that would imply not too much in the channel that is really pretty highly correlated to their actual production with not a lot of inventory in the chain.

Okay, thank you.

Thanks, Peter. We have time for one last question, please.

Your final question will be a follow-up question from the line of Dmitry Silversteyn with Longbow. Please proceed.

Actually, my number one question that I wanted to ask has been answered by the previous call. But I want to make sure I understand what the tax rate will be going forward, if you can provide us with any guidance on that, given that it's always difficult to forecast a tax rate with losses.

Yes, and the tax rate this quarter was around 40% as opposed to historical rates of 31% to 33%. The tax rate going forward will depend upon whether we are operating in a net income position or net loss position. I think the same things that reduce the tax rate during the net income environment actually increase the tax benefit in a loss position. So I think we will have to watch results going forward and the tax rate will be more apparent.

Okay, but would it be fair to say that the closer you are to break even, the closer you will be to a 30% to 35% rate, and if you are still losing money at the same clip you lost this quarter, you will be closer to 40?

Yes, around a break even. I think might see some strange things happening to the tax rate, so it will be difficult to really draw any conclusion. I think it is going to be an area of uncertainty until we see actual results going forward. Sorry, I can't be more specific than that.

That's okay. Can I ask you one question to follow up on that? Is your tax rate dependent much on the where -- than the geographic mix of revenues? Is that another layer of uncertainty where your revenues are going to come from?

No, it's not. We are pretty fully taxable, and what we find are the two things that kind of act to reduce our effective income tax rate are tax exempt interest on our invested cash as well as research and experimentation tax credit. But the geographic mix doesn't play that big of a part in our tax rate.

Okay, Bill. Thank you very much.

Thanks, Dmitry, and 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.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.