CMC Materials, Inc. (CCMP) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter fiscal 2010 earnings conference call. My name is Fab and I'll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, 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 2010, which ended March 31. A copy of our press release is available in the Investor Relations section of our website, CabotCMP. com, or by calling our Investor Relations office at 630-499-2600. Today's conference call is being recorded. It 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 Form 10-Q for the first quarter of fiscal 2010 ended December 31, 2009. In Form 10-K, for the fiscal year ended December 30, 2009. We assume no obligation to update any of this forward-looking information.

Before we deliver our prepared remarks, I would like to remind you about our upcoming investor day, which will be held Thursday, June 3, at the NASDAQ MarketSite in Times Square. 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 the results from our second quarter of fiscal 2010. We reported our second consecutive quarter of record revenue, totaling $98.6 million. This record is particularly noteworthy, as the March quarter has historically been seasonally soft for both the industry and our company. Additionally, we reported gross profit margin of 52% of revenue.

This quarter's results come from solid utilization of our manufacturing capacity, continued productivity gains within our manufacturing operations, the integration of our E pock acquisition, and revenue growth in our CMP pad business. Our revenue this quarter was generally consistent with the monthly trends reported by the large foundries in Taiwan, which included slightly lower revenue in January and February, and the preceding months, followed by an uptick in revenue in March. During the quarter, a number of industry analysts increased their 2010 semiconductor growth estimates from midteen to mid-20% growth versus the prior year.

Within our business, demand across each major semiconductor segment, logic, memory and foundry, appears healthy as we head into the second half of our fiscal year, which is typically a strong seasonal period. Over the remainder of the calendar year, including the PC renewal cycle and Windows 7. Over the longer term, we believe we are well positioned to benefit from capacity additions under way by many of our customers, reflecting their efforts to meet increasing demand. Given the current positive industry indicators, in solid near-term forecast from our customers, we continue to have a strong outlook for fiscal 2010.

We recently commemorated our tenth anniversary as a public company and it's interesting to reflect on the changes that have occurred since we went public 10 years ago. At that time, we had 281 employees, demand for our products was primarily driven by US customers, and we reported revenue of $99 million in the fiscal year leading up to our IPO. Since that time, the company has grown to approximately 900 employees. 80% of our revenue is now derived from customers in the Asia-Pacific region, and we believe we are on track to exceed our fiscal 2008 revenue level of $375 million, following this severe industry contraction in fiscal 2009.

Over the past 10 years, we have steadily built up our infrastructure in Asia so that we now have approximately half of our work force and assets located in the Asia-Pacific region. In addition, we have transitioned to a direct sales model in nearly every region of the world, resulting in much closer relationships with our customers. We have also completed three successful acquisitions. We have maintained our leadership in CMP slurries and we have become the second largest supplier of CMP pads.

While a lot has changed over the years, we remain dedicated to our primary strategy of strengthening and growing our core CMP consumables business through the execution of our key three strategic initiatives. Technology leadership, operations excellence, and connecting with customers. By adhering to our strategy and consistently executing on these three initiatives, we believe we have built a strong foundation for sustainable long-term profitable growth.

Technology leadership has always been an important key initiative for our company and it has evolved over time as our business and customers have evolved. What started out as a sharp focus on product performance transitioned into a drive to develop solutions that improve our customers' total cost of ownership through improving customer yields, increasing customer throughput, as well as simply developing products that cost less. With our consistent investments in research and development, we believe our product portfolio is full and productive, with enabling solutions in all major CMP application areas, many of which can be tuned to meet a wide range of customer requirements.

In the current environment, where semiconductor fab capacity utilization is very high, it can be challenging to gain access to our customers' tool and engineering time to qualify new products. However, we are encouraged by the in roads we are making with customer evaluations for a variety of our new products, including our next generation slurries for copy and barrier applications. We also continue to gain customer positions with our CMP polishing pad, and are making good progress in the alpha testing of our next generation CMP pad platform.

Operations excellence has and continues to be another important key initiative for our company, and one that we believe has begun to provide a competitive advantage. To a customer, a product is only as good as the supplier's availability to provide it exactly the same, day after day, year after year. Given that our customers are working on leading edge processes with ever-increasing complexity, they have extremely low tolerances for product variation. Over the years, we have executed on quality and productivity initiatives aimed at reducing variability in our products and improving quality throughout our supply chain. Evidence of our success in this area can be seen through the numerous supplier awards that we have been granted by our customers. Most recently, Intel, which is known in the industry for its strict quality and technology standards, honored us with its preferred quality supplier award for 2009.

We were one of only 16 companies out of approximately 10,000 suppliers to receive this prestigious award, and this was the third time out of the last four years that we have earned this recognition. In addition to enhancing customer value, executing on our operations excellence initiative has contributed to our strong financial performance. This quarter, we continue to realize productivity gains across a number of projects directed at variation reduction and manufacturing optimization, including the completion of our transition to insource the small portion of our total CMP slurry production that had previously been outsourced.

In addition, we are benefiting from strong utilization of our manufacturing capacity. Production during the quarter was near record levels, and was particularly strong at our facility in Japan. Even with increased customer demand, we are filling more customer orders seamlessly and we have flexibility within our manufacturing operations to accommodate an even higher level demand when needed. Finally, our third key initiative, connecting with customers, has continued to increase in importance as the technology advances, because more challenging technologies require closer customer collaboration to develop robust and timely solutions.

In our early years, we recognized the importance of being physically close to our customers, and have steadily expanded our infrastructure in the Asia-Pacific region as a result. More recently, we are utilizing our technical capabilities and offerings to be a more solution-centric, rather than product centric supplier to our customers. This means that rather than just marketing our off-the-shelf products, we are more actively engaged with our customers to provide solutions that meet their specific needs. The resulting products can be customized from both the formulation and process integration perspective to optimize our customers' performance.

Closing my remarks this morning, our journey as a public company has been exciting and rewarding. We believe the progress we have made over the years through our consistent execution of our strategies has been instrumental in building our company to be the strong industry leader that we are today. We are pleased with our recent financial performance, particularly during a quarter that is typically seasonally soft. In our view, we have momentum in our business going into the second half of our fiscal year and we believe we are poised to capture significant new opportunities over the long-term. We believe the productivity initiatives within our manufacturing and supply chain operations are driving sustainable improved gross profit margin performance and we are optimistic about our ability to add value to our customers by leveraging and optimizing our world class technical support capabilities to improve our customers' operations.

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

Thanks, Bill, and good morning, everyone. Revenue for the second quarter of fiscal 2010 was a record $98.6 million, which was up by 117.1% from the second quarter of fiscal 2009 and up 0.9% from the prior quarter. This increase in revenue from the same quarter last year primarily reflects significantly improved economic and industry conditions. Compared to the prior quarter, sales increased slightly on continued strong demand for our products.

Drilling down into revenue by business area, tungsten slurries contributed 35.9% of total quarterly revenue, with revenue up 85.3% for the same quarter a year ago and down 1.8% sequentially. Sales of copper products represented 18.4% of our total revenue, and increased over 150% from the same quarter last year, which includes the benefit of our Epoch acquisition and increased 5.1% sequentially.

Included in our copper business is our barrier removal product line. Revenue from which increased by 71.8% from the same quarter a year ago. Dielectric slurries provided 28.8% of our revenue this quarter, with sales up nearly 150% from the same quarter a year ago and up 5.9% sequentially. Sales of polishing pads represented 7.3% of our total revenue for the quarter and increased 192.1% from the same quarter last year, and 8.6% sequentially.

Data storage products represented 5.1% of our quarterly revenue. This revenue was up nearly 50% from the same quarter last year, and down 16.9% sequentially. Finally, revenue from our engineered surface finishes, ESF business, which includes QED, generated 4.4% of our total sales and our ESF revenue was up 142.6% from the same quarter last year and down 10.2% sequentially.

Our gross profit this quarter represented 50.2% of revenue compared to 28% in the same quarter last year and 51.6% in the previous quarter. Compared to the year-ago quarter, gross profit percentage increased primarily due to increased utilization of our manufacturing capacity on significantly higher demand. The decrease in gross profit percentage versus the previous quarter was mostly due to the absence of a $1.6 million raw material supplier credit related to achieving a certain volume threshold, which benefited our first fiscal quarter results. Year-to-date gross profit represents 50.9% of revenue, which is slightly above the upper end of our full year guidance range of 46 to 50% of revenue. For the full fiscal year, we currently expect to achieve gross profit margin toward the upper end of this guidance range.

Now I'll turn to operating expenses, which include research, development, and technical, selling and marketing, and general and administrative costs. Operating expenses this quarter of $32.1 million were $2.2 million higher than the $30 million reported in the same quarter a year ago, primarily driven by increased staffing-related costs, including higher accruals for our annual variable incentive compensation program, as well as higher travel expenses and professional fees, including costs to enforce our intellectual property. These cost increases were partially offset by the absence of certain expense items reported in the second fiscal quarter of 2009, which included a $1.5 million write-off of in-process research and development related to our acquisition of Epoch, a $1.1 million impairment related to certain research and development equipment, and a $1 million increase in reserve for bad debt expenses.

Operating expenses were $2 million higher than the $30.1 million reported in the previous quarter, mostly due to increased staffing costs, including higher accruals for our annual variable incentive compensation program. The reinstatement of certain employee benefits that were suspended during the economic downturn, and the impact of salary increases that became effective January 1. Additionally, we incurred higher professional fees, including costs to enforce our intellectual property. Year-to-date total operating expenses were $62.3 million, and we continue to expect full-year operating expenses to be in the range of $120 million to $125 million for fiscal 2010. We currently expect to report full-year operating expenses at the upper end of this range, which includes previously anticipated costs related to our upcoming patent infringement trial against DuPont Air Products Nano Materials, which is scheduled to begin on June 8.

Diluted earnings per share were $0.47 this quarter, up from a diluted loss per share of $0.44 in the second quarter of 2009 and down from diluted earnings per share of $0.56 reported in the previous quarter. Turning now to cash and balance sheet-related items, capital additions for the quarter were $4.5 million. Depreciation and amortization expense was $6.3 million. And share based compensation expense was $3.1 million. We ended the quarter with a healthy cash balance of $241.7 million, which is nearly $17 million higher than last quarter. In addition, we have no debt outstanding.

I'll conclude my remarks with a few comments on recent sales and order patterns. Examining revenue patterns within the three months of our second fiscal quarter, we saw a demand for our CMP consumables products trend slightly lower in January and February versus the prior quarter run rate, followed by a strong increase in March. As we observe 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 at roughly the average run rate of the March quarter. 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'll turn the call back to the operator, as we prepare to take your questions.

(Operator Instructions) And our first question will come from the line of Avinash Kant from DA Davidson. Please proceed.

Good morning, and for you taking my questions. A few questions, Bill, actually, could you point out how much was the interest income during the quarter and was there any foreign currency exchange impact?

You're referring to the line in our income statement of other income and expense. For reference, this quarter we had a loss of $418,000 compared to the same quarter last year, where we had other income of $400,000. There's a number of things that go into this line item.

Sorry. I'm looking at this wrong. $440,000 of other expense this quarter versus 477 in the first quarter of 2010 versus second quarter of 2009. Included in this is interest income on our cash balance, and also foreign exchange, net foreign exchange gains or losses. And the main driver of the swing from income to expense last year at this time versus this year was foreign exchange related, mainly the changes of the Japanese Yen versus the US dollar.

So I was trying to separate out your interest income and the foreign exchange. So if you gave us the interest income in the quarter, we would know exactly how much was the foreign exchange losses.

Yes, really, of those two totals I gave you, the 477 in the second quarter of 2009 versus 440 in the second quarter of 2010, essentially all of that is driven by foreign exchange. The interest income on our cash balance is very, very modest.

Will it be 1 to 2%?

Less than that. I mean current money market funds are paying far less than 2%.

Okay. Also, you talked about CapEx. You gained the CapEx for the quarter. What's the expectation of CapEx with the fiscal year 2010?

Our forecast for capital spending for the year continues to be $13 million. I think we've spent about 5 or 5.5 year to date. And our initial guidance for the year is unchanged, $13 million.

Okay, and could you talk a little bit about on the balance sheet, how much were the good will and intangibles? What was that number?

Right, good will and intangibles was pretty much unchanged from the prior quarter, up around $58 million.

Okay, and talking about wafer stock, of course you have seen -- if wafer stock were to be at the margin -- at the level of month of March, your quarter's going to be higher than the previous quarter. The June quarter.

Avinash, this is Bill, the other Bill. As we said in our prepared comments this morning, the second half of the fiscal year for us is typically a stronger revenue period than the first half of the year. In the June quarter, eight of the last nine years, we experienced sequential revenue increase in our June quarter. And we have no reason to expect anything different this year, given the strength of the first calendar quarter for the semiconductor industry.

And could you talk a little bit about the gross margins in the -- operating margins, gross margins both in the -- business?

We had continued revenue growth in the pads business and if you remember, for fiscal 2009, we talked about $18 million of revenue and low double digits for gross profit margin for pads, with continued growth in pad revenue, we're seeing improvement in gross profit margin above that low double-digit level. Consistent with our treatment of other product lines, we don't plan to disclose anything real specific about that. But we're seeing continued improvement in yields and leverage around fixed manufacturing costs, as revenue increases. So we're seeing gross margin increase on the pads business.

Thank you. I'll let other people ask questions and come back in line. Thank you.

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

Our next question will come from the line of Steve O'Rourke from Deutsche Bank.

Hi, thank you. Good morning. Couple questions. First, why was tungsten revenue down quarter over quarter, and could you elaborate a bit on your copper barrier business? That was up obviously from last year. How did that perform quarter over quarter and how was your positioning going with copper barrier? I'm sorry.

Why don't you take the first question. I'll take the second question.

When you look at quarter to quarter, typically we would see dielectrics and tungsten moving together because they are both driven by memory, but periodically we see things go in different directions and that's what we saw this year, or this quarter. Tungsten was down sequentially around 1.8% and dielectrics was up by 0.9%. But you can't really draw too many conclusions for that. We don't think there's any significant change in position or anything like that. It was just the vagaries of order patterns with different customers.

With copper, we were up 5.1% sequentially this quarter in copper. If you remember, last quarter we had a transition to direct sales as a result of our Epoch acquisition in Singapore that caused our first fiscal quarter to be a bit, a little bit lower on copper sales. So you need to kind of normalize that out. You asked specifically about our position in copper and barrier. We are excited about some of the new products we're introducing that are in qualification and testing now, at a large number of our customers. One of the successful attributes of our acquisition of Epoch is Epoch brought into our company some additional copper and barrier technology that clearly builds on our leadership position in the copper CMP segment. So, you know, we continue to drive very hard with new products and new technology for both copper and barrier, as well as some other materials like aluminum going forward, and we're excited about our position in our emerging position with some of our new products.

Fair enough. And how were ASPs in the quarter?

Sequentially, they were down a couple of percent. Three things we watch when we look at direction of ASPs on our CMP slurries. One, just general price changes. The other is product mix effect, and then we look at foreign exchange effects. Of those three factors, sequentially ASPs were down about 2.5, 2.4%. Most of that was price and product mix effects, not very much foreign exchange. Mostly mix driven, though.

Okay, and lastly, just on the pads business, I know I asked this last quarter. Any update on the timing of the D 200 qualifications and transition into production?

Steve, you're going to get the same answer.

Fair enough. I thought I would ask.

I appreciate you asking. Keep asking. You know, we are, as I think I've said before, we're taking the same disciplined and pragmatic approach to bringing our new technologies to market. We do our best to make sure when we bring a new technology like D 200 to the market that we've fully validated both the supply chain and the technology. We are doing that with D 200. We are out there with a couple of Alpha customers, which helps us to improve both our product offering and improve on the way we position the pad and which segment of the market. And our technical teams are working as diligently as they can to get our handles together on how we can tune the pad for our customers. What we're trying to do is come to the market with a pad that can meet very specific customer requirements in a way where we can very easily modify the properties of the pad, given our, given our flexibility with this new technology on things like porosity and density and pad hardness. But when the time is right and we start to record revenue from that technology, we would be more than happy to share that with you, Steve.

Fair enough. Thank you.

Thank you. Moving to our next caller, please.

Our next question will come from the line of Dmitry Silversteyn from Longbow Research.

Good morning, gentlemen, and Amy. Couple of questions, if I may, to follow up on earlier discussions. You've had a run-up in year-over-year, as well as sequential SG&A expenses. You're talking about spending at the upper end of our 125 to 120 million guidance. Are you going -- averaging some of these costs and investments that you're making in SG&A where we can see margins actually improve rather than be hampered by high operating expenses.

Let me talk a little bit about operating expenses, particularly the sequential and the year-over-year increase. If you look historically, the March quarter typically has higher operating expense, just due to calendarization. January 1, we kind of reset the clock on Social Security withholding, state unemployment, income tax. In this year's case, we had suspended the company's 401(k) match previously and we reinitiated that, effective January 1. So you had three factors there that caused staffing costs to go up. In addition, I mentioned higher accruals on the variable incentive compensation program.

We're performing well this year against prior comparisons and also against our corporate objectives. And so we have higher accruals for that variable bonus program. Last year in kind of a dismal year for the industry, we performed well. But obviously didn't hit our marks. And so the accruals for those bonus programs were much, much lower. So you see some of that effect and that's variable. That's not fixed. So depending upon performance against goals and future periods, you could see that move.

In addition, we've got the IT litigation that is ongoing. And I mentioned we've got a June 8 trial date. And so there's quite a bit of preparation for that. And so professional fees have been a bit higher this quarter compared to the prior quarter and also compared to the prior year. So those are things that are driving costs sort of in the near term.

But if you look at our guidance for fiscal year 2010, the upper end of the range is $125 million, which is the same level in dollars as 2008. 2009, we went down to $112 million. So we flexed down with a poor economy and poor industry, and now we've returned back to about a 2008 level during a period where we say we're on track to exceed revenue from the 2008 level. So we feel like we are leveraging operating expenses.

Ours is a technology and customer intensive business. And so there's a lot of touch with the customers. So one way that we support 50% gross margin is with the relatively high level of operating expenses. And that's our strategy.

I understand that, Bill, but I'm looking at your R&D and selling and marketing expenses, which are more or less, I would say trending normally, given 2009 aberration where we had to ratchet down some expenses. But it's your general administrative expenses that seems to be moving around quite a bit quarter to quarter. Can you give us an idea where you expect expenses to be in the June quarter. You provided kind of the updated annual guidance, but sometimes you also give us an idea of what the operating--

I couldn't be as granular as that, but G&A would include -- that's where our IP litigation costs, professional fees would be, and also a significant portion of this variable incentive comp accrual. So that would drive something on that line item. I don't have specific guidance for the June quarter, or the September quarter. The June quarter, we will be in litigation. So it wouldn't be surprised to see litigation fees somewhat higher. But there is some fluctuation and volatility in our operating expenses. So as we look at the full year, our expectation is to be at the high end of our guidance, $125 million.

So would it be fair to expect at least that sequentially, that the June quarter operating expenses should be up?

The portion of those costs driven by litigation fees could be, but there are other things we talk about periodically, like wafer expenses and expenses in our laboratories that fluctuate sometimes, half million dollars or so either way quarter to quarter. So I think it would be safe to say that probably our professional fees around litigation would be up. Other things could be offsetting that, but given our guidance, sort of flattish type operating expenses, it would be consistent with full year guidance.

Okay. That's helpful. Then second question, you mentioned that you've gotten to be second biggest player in payouts, obviously after the Rodell business. Does that mean that you're closing in on the double digit market share in terms of your overall market presence? And have you been able to test pricing favorably in the pad business now that you've gotten a little bit firmer foot hold in the market?

Dmitry, we haven't shared market share. We won't share market share. We feel comfortable in the steady progress we're making in our pad business. It seems every quarter we have another win either with an existing customer or new customer. And that's kind of the progress we look for inside the pad business. Your question about pricing, we haven't really changed our pricing since we first introduced our pad technology. As I said before, we're doing our best to price, value price our offering.

We think we're bringing significant incremental value to our customers in the form of longer pad life. And we continue to get empirical evidence and maybe a little bit stronger evidence that we have a pad that's resulting in lower defects in certain applications at our customers. And so we're doing, we're doing what we always do. We're trying to quantify that value and we charge for that value and we've been pretty successful, we feel, to date.

Final question before I get back into queue, both data storage and ESF business was down quarter to quarter double digits. You know, outside of the tungsten vagaries that Bill already addressed in the earlier question, seems to be the only two businesses that have not done well essentially. Is that just seasonality being more pronounced in those businesses, or is it -- quarter to quarter, is there anything particular going on? Can you talk about particularly the ESF business, which seems to be treading water a little bit here and not really driving much in terms of revenue or profits for you guys. And then data storage, I mean I would have assumed that data storage markets would have moved along with the semiconductor and the printed wiring board markets and the electronics overall, which seems to have been strong even March quarter to December quarter.

So first with respect to data storage, up until this quarter, we had seen four sequential quarters of strong growth. So we've registered some pretty good growth in the data storage business and then we pulled back this quarter. I don't think we see any real significant drivers in that. It's pretty volatile, a limited number of customers, quite a bit of consolidation, quite a bit of competition. But our second fiscal quarter followed four pretty strong quarters. So I think no real messages to take away from that.

With respect to QED, that's really, it's a capital equipment-based business, right? And so the capital equipment cycle has not recovered to the extent that wafer starts have. For example, semiconductor capital equipment is turning up some QED, supplies optics for semiconductor, capital equipment, and so that's driving some of their business. A big portion of their business is broader capital equipment outside the semiconductor industry and that's a capital equipment cycle that's been a little bit slower to return. Down sequentially, but significantly better than several of the quarters we saw in fiscal 2009.

So would it be fair to say that the best dates for this business in terms of economic recovery in this cycle are still to come?

Dmitry, we think that, as Bill explained, the capital cycle for the semiconductor industry has driven sales in our QED business. But the rest of their business is still -- it just feels like they are behind the semiconductor recovery, or semiconductor capital equipment recovery that we've seen in the industry. The other interesting report -- we just introduced a new technology called ASI technology that's getting a lot of interest and excitement in the high end precision optics world. And, you know, we are excited about that technology and we're hopeful that that will drive additional incremental sales of QED's technology.

Thank you.

(Operator Instructions) And your next question is a follow-up from the line of Avinash Kant.

Yes, a few questions. I missed your comment in the margins. Could you repeat margin comment, gross margin comment that you had for fiscal year, and I think you said you would be coming in at the higher end of that.

That's right. Our guidance range is 46 to 50%, given through the first half of the year we're at 50.9%. We're not changing our guidance, we're still sticking with the 46 to 50%, but given performance to date and anticipation of a continued strong environment, we are pointing toward the upper end of that range.

This one does include the additional gain you had in the first quarter, the 1.6% gain you had for the special administration.

Yes, that's right.

It includes that, right?

Yes, that's correct.

Okay, and there's been some discussion about inventory at key customers, especially foundry at this point. In your discussions with them, have you heard anything about double ordering or inventory?

No. Avinash, we have not. What we have heard is that leading edge technologies at our boundary customers are an allocation. We're hearing a little different message about inventories in the channel. You know, I think in general, this is a general comment, I think the foundries get -- and rightly so, they get very concerned about their customers double and triple ordering. And, you know, I think you saw a recent message from TSMC that talked to that. But as far as we can tell at the leading edge, the foundries are at capacity and they are in allocation with their customers. So in our view, we don't think there's an inventory problem in the channel.

Typically how much visibility do you get from your customers? How much ahead of time do they let you know what kind of material needs are going to be? Is it a quarter, two quarters? How much is that?

I would say it's a quarter or less. In our business, and I think a lot of suppliers through the semiconductor industry have the same challenge, if you will. We get, we get queries from our customers about our ability to meet increasing demand. But we never get really a specific number. We just get this, are you guys going to be ready if the industry should turn up. Fortunately in our case and with our technology, we're a low capital cost business and we can bring capacity on very quickly if we need to. And so we don't, we don't have the visibility that we would like. And in fairness to our customers, they don't have the visibility that they would like either.

Okay, and on the question of the pads business, of course your pads business seems to be growing pretty steadily here. Could you talk a little bit about the customer attraction or higher adoption, or what are you seeing there?

Well, I think, the question I answered earlier, we're steadily and surely growing our position in the pad business. So, the recession of 2009 was a bit of a speed bump on the road to success with our pad business. As you know, many of our customers shut their fabs down and sent their engineers home. That's not a good environment to be doing process development. And then when the industry recovered as quickly as it did, our customers were scrambling to bring capacity online and we had somewhat limited ability to get in and qualify a new pad with many of our customers. I wouldn't describe things as stabilizing yet. I think our customers are still somewhat scrambling to bring additional new capacity online to meet the increasing demand. But we see more and more opportunities to get in there and work with our customers or potential customers for our pad technology and we'll just continue on with our drive to bring our pad technology to the market and develop our next generation technology and bring that to the market as well.

If you could talk a little bit about the growth that you are seeing in the pads business at this point, is it coming primarily from the existing customers using more of it, or are you being able to add customers, too?

It's a bit of both, Avinash. Some of our customers will, you know, they will try our pad on a specific application, like copper or tungsten or STI, whatever it may be. And they will validate both the technology, they will validate the value, and then they will begin to incorporate the pad on other lines or other technologies. That's with an existing customer. And then with the new customer, it's just the normal process, or product development process that we go through to qualify new material at one of our customers. You know, and I think as you know very well, that process can take a very long time, depending on the customer and the market that they sell into. But that being said, we continue to remain confident and optimistic about our pad business.

Okay, and one final question if I may ask about the litigation. I believe the trial date has been set up. Getting into this one, what, what is on the table here? Could you highlight a little bit about what could be -- what are you trying to get out of this?

Well, we're -- what are we trying to get? We're -- well, at the highest level, this company invests a significant amount of its revenue back into the company in the form of R&D. And that R&D results in new products and technologies, which we patent and protect. And we believe it's our job to enforce that intellectual property around the world. And that's what we do. And in this case, we clearly believe that DuPont Air Products Nanomaterials is infringing on our tungsten technology, and we want them to stop. I think that's as much as I'll say at this point in time as we go into trial.

Okay. Perfect. Thank you so much.

Thanks, Avinash. We'll take one last caller.

Our last question will come from the line of Chris Kapsch from BDR Research Group.

Yes, I had a question. In your general characterization of your business, you talked about how increasingly your products are more customized or tuneable for your customers. I assume that's really skewed more toward the advanced applications at the most advanced technology nodes, but I'm also curious if, say, if it applies to, like, say copper versus dielectric. In other words, are your copper and SDI products more customized or tuneable vis-a-vis dielectric or tungsten?

That's a great question, Chris. I think as the technology advances, you know, we get past 45 and down to 32 and 22, and we're even engaged at 11-nanometer technology now, we're seeing the same complexity. And if you call, consider it level of difficulty at all the CMP application areas, and we think that as we get to these really advanced nodes that we're going to require somewhat customized solutions at each node for each customer. That sounds like a kind of daunting proposition and it might be if you didn't have the scale and the resources like Cabot Microelectronics has around the world. And the way we've tried to approach this is we developed -- we talked about this before. We developed these platform technologies that give us the ability to modify them to meet very specific customer requirements. I think if we try to split up the areas, you know, the die electric trick business is, of course, the longest serving CMP application. It tends to be maybe an area where our technology that historically has not required or hasn't brought itself to a lot of research and development.

We're changing that as we approach these next node technologies and we're looking at bringing new materials and new solutions to that segment. The tungsten CMP segment is an area we continue to innovate, continue to develop new products to meet the needs of the advanced node technologies, and copper and barrier and some of the new materials that are going into these integration schemes are sort of right in our sweet spot, and our ability to innovate and create products to meet the process parameters and the integration schemes of some of our leading edge customers. But it's getting more challenging and it getting, it's getting more complex and I think it's getting a little riskier as a supplier to this industry. But we believe we're well positioned and well suited to meet those challenges and accept those risks.

And just following up on that, though, and this is sort of in the context about the comment about your customers' capital spending patterns increasing and I guess there's some capacity buys and presumably technology buys along with that. But to the extent that those investments by your customers are on, more on the technology buys, does -- and thereby increasing your overall business mix towards the leading edge, does it manifest itself in such a way that your manufacturing process become much more, you're producing more customized products and therefore can actually have a detrimental effect on your gross margins as opposed to a mix that's mostly more made to stock so to say?

You're right. I think what you're describing is an SKU risk, right, where we overwhelm ourselves with too many products. Our process technology, I would describe it as a batch process technology. This is in our slurry technology, not our pad technology. It allows us the flexibility to custom make and tailor make batches of products, but your question is a really good one and it's one our operations people pay a lot of attention to. As we think about it and we embark on a new product development process, we clearly have the manufacturing people at the table to guide us through the complex advertise and costs associated with bringing on a very unique new product that might require its own production line for either contamination issues or whatever it may be. With that being said, many of the applications we see in advanced node technology might be a little more niche-y than what we've seen in the past. We think that there's value in niches and that we can maybe extract some value in our ability to meet those requirements and do it in the way the Cabot Microelectronics has always done it.

The niche way, you'll get paid for it either way?

Well, we would hope so.

And then finally, just to follow up on your comments on the upcoming litigation, I assume from your comments that your strategy has no interest in reaching some sort of licensing agreement on this particular knowledge in question.

Chris, we're two months away from trial. It's probably not prudent of me to answer too many more questions about the litigation until we get into trial.

Okay.

I mean, I hope that's okay. I just -- we're trying to be responsible here.

Fair enough. Thank you.

Okay.

Thanks, Chris. And thank you for your time this morning and your interest in Cabot Microelectronics. We look forward to seeing many of you at our upcoming investor day in New York on June 3. Good-bye.

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