CMC Materials, Inc. (CCMP) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Cabot Microelectronics earnings conference call. My name is Brian, and I will be your operator today. At this time, all attendee lines are muted and in a listen-only mode. We will be facilitating a question-and-answer session after today's prepared remarks. (Operator Instructions).

I would like to now turn the call over to Ms. Amy Ford, Director of Investor Relations. Please proceed, ma'am.

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 2011, which ended March 31. A copy of our earnings release is available in the Investor Relations section of our website, cabotcmp.com, or by calling our Investor Relations office at 630-499-2600. A webcast of today's conference call and the script of this morning's formal comments will also be available on our website.

Please remember that our discussions today may contain 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 2011, ended December 31, 2010, and Form 10-K for the fiscal year ended September 30, 2010. 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 strong financial results for our second fiscal quarter of 2011. We reported revenue of $109.7 million, which was up 11.3% from the same period a year ago, due to stronger demand across all our business areas. Compared to the prior quarter, revenue was down 4%, reflecting historical seasonal trends for our Company. When compared to our results in the second quarter in previous fiscal years, we achieved a record number of revenue and earnings per share. Year-to-date revenue was up 14.1%, and diluted earnings per share were up 22.8% versus last year, which we believe positions us well for another outstanding fiscal year.

As we consider the current semiconductor industry outlook, we continue to see many positive signs. A number of semiconductor industry analysts are continuing to forecast solid semiconductor industry growth in 2011, with estimates generally ranging from 5% to 9% growth in semiconductor units. In addition, our customers' near-term forecasts appear to remain strong, and end use demand for electronics appears healthy. This strong end use demand is being driven by mobile wireless platforms, enterprise spending, and emerging economies.

Like all of you, we are deeply saddened by the tragic events in Japan last month. Fortunately, our employees and facilities in Japan were not directly impacted, and we continue to operate without interruption. Our global team, and in particular, our colleagues in Japan, have been proactively addressing the status and needs of our customers and suppliers, and we have made it our priority to assist them through this difficult time, as a trusted industry partner. It currently appears that the industry will be able to fill potential supply chain gaps before they become a significant problem. Although a number of important semiconductor manufacturers are located in Japan, it is estimated that only 4% of the world's advanced wafer starts were directly impacted by the disasters. Therefore, we believe the effect on global wafer starts is expected to be minimal.

Turning now to Company-related matters, we have continued to execute on our strategy to strengthen and grow our core CMP consumables business, as well as to advance our engineered surface finishes business. With our CMP pad business, we continue to make inroads on customer adoptions and have a solid pipeline of evaluation activity for both our Epic D100 portfolio, as well as our new Epic D200 tunable pad platform. I am delighted to report that our D200 pad has been selected and qualified by a new pad customer as a result of the consistent performance of our D200 pad over the life of the pad, as well as our ultra-low defectivity. The application for which our D200 pad was selected is currently in our customer's R&D phase, and we expect to receive related revenue from this win once the customer begins ramping production of its sub-32-nanometer technology node. We believe timing for this revenue is likely to be several quarters away. We also have a couple of other promising opportunities with other customers in various stages of alpha testing and evaluation for leading-edge applications. Overall, we are pleased with the robustness of our pad technology and the continued customer interest in our pads' capabilities, including opportunities for total cost of ownership reduction through improved yields and pad life.

Next, I want to give an update on our expansion efforts in South Korea. The construction of our manufacturing and research and development facility is progressing on schedule, and we are hiring and training employees for this operation. We currently expect the building construction to be completed by the end of this fiscal year and equipment commissioning to begin in October. We believe this new facility will provide the local manufacturing and development presence that our South Korean customers desire and will enhance our ability to collaborate in real time on development programs, positioning us well for future business opportunities.

We have also made significant progress on the expansion of our manufacturing capacity in Geino, Japan, which we anticipate will come online next month. This additional capacity in Japan was driven by the growth of our tungsten and dielectric businesses in the Asia Pacific region. In particular, we successfully targeted and are providing solutions for a new segment of the tungsten slurry business called buff applications. As the name implies, this type of CMP polish step is very quick and requires minimal material removal. Our revenue from this new business area has grown to roughly $20 million a year and complements our existing strong position in tungsten slurries for bulk removal applications.

The situation in Japan has served as a reminder to us and to our customers that there is tremendous value in working with suppliers that not only have redundant manufacturing facilities and solid business continuity plans, but also operate as trusted business partners. With four, soon to be five, slurry manufacturing plants worldwide and a global network of suppliers, we believe we are well positioned to mitigate supply interruptions when the unexpected occurs. Also, immediately following the earthquake, we received a number of urgent sample orders from customers looking to qualify a second source of certain CMP slurries. Our account teams, which are familiar with our customers' processes and needs, were able to quickly engage with our customers regarding potential solutions. During this time, our employees pulled out all of the stops to expedite requests and support qualifications with the attendant service and speed that our customers expect. We believe that our ability to address our customers' concerns with openness and speed reflects the strength of our customer relationships and their trust in us as a supplier and as a business partner.

Finally, our customers continue to recognize the success we have had in building our business partnerships with supplier awards that we win. For example, last week, we were one of only 16 suppliers to be honored with Intel's prestigious Preferred Quality Supplier award for 2010, which represents the fourth time in the last five years we have received this award. Intel is known as a leader in the industry for its very high quality supply chain and technology standards, so achieving an award like this is quite gratifying and speaks volumes about our ability to supply innovative, high-performing CMP solutions on a consistent and reliable basis.

Concluding my remarks today, we are pleased with our solid financial results and progress with executing our strategies. We are optimistic regarding continuing strong semiconductor industry demand in 2011. We believe our investment in South Korea will enhance our competitive position with advanced memory customers there, much like our expanded footprint in Taiwan has enhanced our business with the foundries. We also look forward to translating potential opportunities from our new products into value for our shareholders and strengthening relationships with our customers.

And with that, I will turn the call over to Bill.

Thanks, Bill, and good morning, everyone.

Revenue for the second quarter of fiscal 2011 was $109.7 million, which was up by 11.3% from the second quarter of last year on increased demand across each of our business areas and down 4% from the prior quarter, reflecting historical seasonal trends. Compared to the prior quarter, revenue increased within our engineered surface finishes business, while all other business areas decreased. Year-to-date, revenue is up 14.1%, driven by double-digit growth in each of our business areas.

Drilling down into revenue by business area, tungsten slurries contributed 36.7% of total quarterly revenue, with revenue up 13.7% from the same quarter a year ago and down 4% sequentially. Sales of copper products represented 17.8% of our total revenue and increased 7.3% from the same quarter last year and decreased 4.9% sequentially. Dielectric slurries provided 27.1% of our revenue this quarter, with sales up 4.7% from the same quarter a year ago and down 4.6% sequentially. Data storage slurry products represented 6.4% of our quarterly revenue. This revenue was up 38.4% from the same quarter last year, reflecting several new customer wins, and down 1.9% sequentially. Sales of our polishing pads represented 7% of our total revenue for the quarter and represents an increase of 7.1% from the same quarter last year and a decrease of 7.6% sequentially. Finally, revenue from our ESF business, which includes QED, generated 5% of our total sales and was up 26.8% from the same quarter last year and up 7.2% sequentially.

Our gross profit this quarter represented 48.1% of revenue, which is down from 50.2% in the same quarter a year ago and 50.3% in the prior quarter. Compared to the year-ago quarter, gross profit percentage decreased, primarily due to the adverse impact of foreign exchange rate changes, selective price reductions, and a higher fixed manufacturing cost, partially offset by the benefit of increased utilization of our manufacturing capacity. The decrease in gross profit percentage versus the previous quarter was primarily due to selective price reductions, higher sample costs related to product evaluations, higher logistics costs, driven by increased oil prices, and lower manufacturing yields. Year-to-date, gross profit represented 49.2% of revenue, which is consistent with our full-year guidance range of 48% to 50% of revenue.

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 $33.3 million were $1.1 million higher than in second quarter of fiscal 2010. The increase was primarily driven by higher staffing-related costs and higher clean room material expenses, partially offset by lower professional fees, including costs to enforce our intellectual property, and lower travel expenses. Operating expenses were approximately $300,000 higher than in the previous quarter, mainly due to higher clean room material expenses, staffing-related costs, and professional fees, partially offset by lower travel expenses. Year-to-date, operating expenses were $66.3 million or 29.6% of revenue.

We currently expect our full-year operating expenses to be in the range of $130 million to $135 million, which represents an increase from our previous full-year estimate of $125 million to $130 million for fiscal 2011. The increase in full-year operating expenses is primarily due to higher staffing-related costs than previously estimated. The midpoint of this new range represents a 2.3% increase versus fiscal 2010.

Diluted earnings per share were $0.55 this quarter, which is up from the $0.47 reported in the second quarter of fiscal 2010, primarily due to the higher level of sales. Compared to the previous quarter, diluted EPS was down from $0.71, mainly due to the lower level of sales and gross profit margin. Earnings per share for the quarter were adversely impacted by approximately $0.05 versus the prior quarter, due to taxes associated with compensation expense we had previously recognized, as well as higher average diluted shares outstanding, as a result of stock option exercises and the dilutive impact of in the money outstanding options in light of our higher stock price. These share count increases were only partially offset by share repurchases. Year-to-date, diluted earnings per share of $1.26 were up 22.8% compared to last year.

Turning now to cash and balance sheet related items, depreciation and amortization expense was $6 million, share-based compensation expense was $3.8 million, and capital expending for the quarter was $7.9 million. Based on updated assumptions around timing and costs associated with our South Korea and Japan expansions, we now expect our full-year capital spending to be about $35 million, which is up from our previous estimate of $25 million. In addition, we purchased $15 million of our stock during the quarter, which completes our $75 million share repurchase program. Future share repurchases will be made under our new $125 million program, which was authorized last November. We ended the quarter with a cash balance of $278.3 million, which also reflects $18.3 million in cash proceeds from the exercise of stock options.

I will 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 demand for our CMP consumables products decrease in January, reflecting decreased demand around the Lunar New Year, and then a further decrease in February, which is a short month. These declines were followed by a strong uptick in March, our highest total revenue month on record. 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 orders trending in line with the level we saw in March. 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.

Thank you, sir. (Operator Instructions). And your first question comes from the line of Avinash Kant from D.A. Davidson & Company. Please proceed.

Good morning.

The first question I had was regarding the last comment that you made regarding run dates in the month of April running at pretty much the all-time high. If that were to continue, do you think we're headed to an all-time high revenue level in the quarter? Also, if you could maybe try to reconcile some of that with the comments that we got from TSMC, because that historically has been a good indicator for your revenues.

Sure. I think Avinash, our results this quarter reflect the revenues of the foundries in Taiwan, which is consistent with what we've said for perhaps the last two years. We finished our first calendar -- our fiscal quarter, the December quarter, with record revenue, which followed sort of four consecutive quarters of record revenue, and we weren't surprised to see a bit of a cool off or slowdown or a normal seasonality that we'd see in our second fiscal quarter.

You know, as Bill always does and I'm going to do, that -- he always cautions that several weeks of CMP orders don't reflect the quarter. But as he said in his comments, March was the strongest month we've ever had in our history, and you know, the first three or four weeks of April look just like March, so we're optimistic. The comments coming out of TSMC last night sounded fairly bullish for growth the next quarter and for the remainder of the year.

You know, it's-- there's some uncertainty out there, as you know, because the other foundries aren't predicting that sort of growth or are as bullish. So, you know, I don't want to go on record as having some knowledge that no one else knows. I just think we have to wait and see what happens and the next couple quarters. We don't have as much transparency as we'd like to have, and so we'd be cautious. But we started this fiscal year optimistic, and we remain optimistic for the remainder of the fiscal year.

Also, Avinash, if you look back at -- historically, our June quarter is stronger than the March quarter. Every year since 2002, we've had a sequential revenue increase in our June quarter, so there's some seasonality -- seasonal strength that we're heading into after the March quarter, typically.

And also, some of the negative impact that you saw on the margin front and also on the tax rate front -- could you talk about what margins -- are you done with the expedited qualifications that you've been working on, or they are still going on and they may still impact the June quarter? How should we think of margins and also the tax rate effects to stabilize?

Well, we continue to maintain our guidance for the full year, which is 48% to 50%. And you know that quarter-to-quarter, things like product mix, manufacturing yield, capacity utilization, foreign exchange rate effects, things like that, can cause pretty significant shifts, quarter-to-quarter. In this year -- this quarter, we saw two percentage points difference.

But in terms of the sampling costs, that was -- they were higher than we've seen historically, large enough that we mentioned it as a cause of a gross margin variance, and those have been lumpy in the past. But that was an usual quarter of sampling costs this time.

Okay. So that should not be the case in the June quarter, right?

We wouldn't expect that, if the historical trends persisted.

I think Avinash has a question about tax, as well.

Okay. Yes, could you tell me your tax question again? Sorry.

Yes, taxes seem to be higher this quarter. How should we model it going forward?

Right. We had -- so if you -- we've seen a little volatility in our tax rate. For example, in the first quarter, we had a low tax rate of less than 30%, and this was sort of abnormally low, driven by the reinstatement by the government, US Government, of the research and experimentation tax credit. And there was sort of a catch up of that credit that we and others recognized in our first fiscal quarter. In the second fiscal quarter, we had kind of a one-time tax charge associated with previously recognized compensation expense, that we had recognized in 2008 through 2010. So, that was sort of a catch-up issue. You wouldn't expect that to persist going forward. So, our tax rate that you should expect going forward would be between 31% and 33%, but really probably focus around 32%.

Okay. Perfect. Thank so you much.

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

And the next question comes from the line of Aaron Husock of Lanexa Global. Please proceed.

Great. Thanks for taking my questions.

Just to follow up on the strength that you're seeing in March and April. While TSMC's guidance certainly wasn't bad, it was much more muted than their normal June quarter seasonality, and UMC had also seen a real downtick from what they've been expecting, but it seems like, if anything, you've seen orders increasing. I mean, do you worry that some of what you're seeing is people putting in buffer stock as they look to manage their supply chains around the situation in Japan?

That's a good question, Aaron. We don't think so.

Like everybody else, we're trying to sort through the wafer shipment data, the wafer start data, the, you know, the inventory data. And I just think there's a lot of uncertainty right now. The comments coming out of[Morris Chang, both at the start of the year and some of the comments he made last night, at least the comments I've seen, I think are optimistic comments from Morris. He talked -- I heard him speak about the foundry business, and he believes TSMC will grow when others might not, and we believe that as well. So we think we're in good shape and well positioned with the foundries in Taiwan.

In the quarter, we -- our memory business, we think, was up slightly, wafer starts were up slightly in memory. Where that goes in the next couple of quarters, we're not clear, and we don't claim to have that kind of transparency. I'd just say, we were delighted to see the uptick in March and the continued strength in April. I just think it points to a solid quarter, assuming that it stays this way. And again, it's -- we only have a limited window through this -- this far through April. But we remain optimistic. I think there might be some inventory builds as a result of the Japan crisis, but that seems to have settled down a bit. The supply chain seems to be maybe more robust than people originally thought, and our customers are finding ways to source materials.

So we'll see. We'll just see. This is kind of a period of uncertainty, though, I have to say, I think.

Okay.

And then, as you rush to get qualified as a second source in some cases due to the situation in Japan, can you just kind of refresh us on what the typical qualification time is, how long does this take?

Well, I think it's -- it's too early to call, but in this sort of -- it's funny how fast you can get a qualification done when there isn't a material out there to use. It's not funny, it's serious, but qualifications tend to happen faster.

You know, just to be complete, we -- immediately following the crisis, we not only reached out to our customers, we reached out to several of our competitors that are located in Japan and offered assistance in any way we could. We just didn't think this was the time -- we thought this was the time to help people out and be supportive to the industry, and we did just that. So we started some calls with some of our customers that are still in place. Whether those lead to revenue, I think it's too early to call. Like I said earlier, the supply chains have returned. Some of those suppliers that were down for a while are back online and supplying products. So overall, I think the long term health of the industry is okay is year will perhaps not be as severely impacted as people might have originally thought.

But in general, those quals for these kind of materials in some cases take years, Aaron. In this situation, I think they'd certainly accelerate a qual if they thought they were going to have a shortage of a raw material.

Okay. Okay.

Then on gross margin, you listed quite a few factors for the sequential decline. Can you kind of try to give us, on order of magnitude of the different factors, I mean, maybe if it was priced or lower yield, would any of those more than 100 basis points sequentially for kind of the majority of the sequential decline?

No. Actually, I mentioned four factors, and they were roughly equal in effect. The selective price reductions, logistics costs -- higher logistics costs, higher sampling costs, and manufacturing yields in our facility. So no single driver for various impacts, all relatively the same size.

Okay. Great.

On the buyback, you guys have been pretty diligent about buying back stock, but I noticed the share count -- the diluted share count was up this past quarter. So can you kind of help me think about why we're not seeing a little bit more of an impact on the share count as you buy back stock?

Yes, it was kind of a one-quarter phenomenon. We had, with the run-up in the stock price, you've seen that there were quite a number of exercises of stock options within the Company that added to the share count. In addition, as the stock price goes up, more of the stock options that are outstanding become in the money. And under accounting rules, as we calculate the average -- effective weighted average shares outstanding, that enters into it. Some of the in the money options go into the share count.

So both of those were sort of functions of the increase in share price. And then, that was only partially offset this quarter by share repurchases. We repurchased $15 million of stock, and so, on a weighted average basis, you get the benefit of half of that in the share count for the quarter. But those are the three factors that impacted that.

Okay. Great.

Just one last one from me. I kind of understand why pad revenue would be down seasonally in the March quarter, but we're down to the point where you're only growing -- I think it was 7% year-over-year in your pad business. Can you -- I have to assume that's slower than you'd like. Can you help me think about why, at least for now, pad revenue is stalled a little bit? Did it take the D200 ramp to get it going again, or is the underlying unit volume strong and pricing is just more difficult in pads?

Well, I think there's a couple of things going on. The first one is, you know, in the last couple of quarters, our customers have been running as hard as they can to generate as much revenue as they can, which limits our availability to tool time for qualifications. You know, we've talked about that before, and that's always an issue.

On one hand, it's a great thing, because our revenue goes up. On the other hand, it's not so great, because it slows down our qualifications. But that's just the way it is, and we accept that.

You mentioned it. We've entered the market. We are now -- I think our share is roughly 7% of the market in pads. We are the number two pad supplier. And that's created some competitive activity, as we expected, and we're dealing with that and we're addressing it.

So your comment about units and pricing is fairly accurate, but we remain very optimistic about our pad. We have qualifications at a large number of customers -- actually, a large number of customers with our D100 pad. We're excited about this qualification we've gotten with our D200 pad, which is our first, and we think that will lead to many more. We remain very optimistic and continue to drive our pad business and, you know, think we have a real incremental winner here for the Company.

Great. Thank you.

Thanks, Aaron. We'll take our next caller, please.

Your next question comes from the line of Eugene Fedotoff of Longbow Research. Please proceed.

Good morning. Thanks for taking my questions. Most of the questions I had have been answered. I just have a couple follow-ups.

Could you remind us what your exposure is to Japan in terms of sales, I guess?

Japan's about -- roughly about 15% of our revenue.

Okay.

You also mentioned selective price reductions impacting gross margin in the quarter. Could you provide a little bit more color on what those price reductions are on those products?

Right. That was -- this quarter, that was mainly in our tungsten product line. And as we -- for situations where we will offer some price adjustment in exchange for a long-term supply agreement or long-term commitment by the customer, and that was the case in this quarter.

Okay.

It also seems that R&D expense was a little bit higher this quarter, up about $1 million from prior quarter. Could you give us a little bit more color on why that was higher?

There were kind of two factors. One was higher -- we've had a lot of activity in our clean rooms, and we include in R&D expense the wafer costs and costs for materials in the clean room. So wafers in R&D were up, and if you -- you've followed our Company, historically, there's some volatility in that. We see that go up and down. We expense the wafers as we buy them, so if we make a big spend, that goes to expense in the particular quarter. And then we also had some higher staffing-related costs, including separation costs for one employee.

Okay. So do you expect R&D costs to come back to around $13 million going forward in second half?

Well, we think about operating expenses in total, R&D and technical support, selling and marketing in general, and administrative. So, given the run rate in the first half of the year, we did increase our full-year guidance for operating expense from -- it had been $125 million to $130 million. Now it's $130 million to $135 million.

But that's probably the only guidance we could really give. But it was sort of an uptick in R&D spending. Normally, we talk in terms of operating expense kind of in total.

One way to think about our wafer expenditure is it reflects the intensity of our development and qualification activities with our customers. So it's not necessarily a bad thing that we consume a lot of wafers in a quarter. We expect that to lead to revenue growth in the future. That's just the nature of our development process and how we utilize our clean rooms around the world.

Okay. Thanks.

And just the last question, a follow-up on the share repurchase program. Do you expect to repurchase more or less compared to $15 million that you purchased this quarter going forward and particularly in the next few quarters?

Well, we have a history of share repurchases. We've completed $140 million of share repurchases over the past six years in three different programs. So we've most recently completed our $75 million program and now have a new $125 million program. We've never given indication ahead of time what our plans would be with respect to that but report them on an after-the fact basis. Historically, our spending has been in the range of 0 to 10 to $15 million per quarter, but yes, really no guidance on that. But we have a new, significantly larger share repurchase program and a strong cash balance, so that's likely a use of some future cash.

All right. Thanks.

Thank you.

Thanks, Eugene. We'll take our next caller, please.

Your next question comes from the line of Chris Kapsch of BDR Research Group. Please proceed.

Yes, hi. A couple questions.

One, just on the strength in March and thus far into April. Can you provide some color as to the source of that strength in terms of mix? Is it skewed towards, say logic versus memory versus foundry, or is it across the board in terms of your customer mix?

Yes. We have within a month relatively limited visibility into sort of the nature of the sales. What we're tracking are orders during the month, rather than sales that are closed at the end of the month. So I don't think we have any particular insights into that now, but we are gratified by the continued strength in April that we are seeing relative to a very strong March.

Okay.

And then just to follow up on the issues or causes for some of the sequential gross margin climb, you explain the one-off on selective price reduction. I think sample costs and logistics are straightforward. But on the yield, it's a little, in a generally -- just wanted to understand the yield a little bit more, because in certain quarters, last year, I believe, based on your FIFO cost accounting, you get a sequential benefit in a quarter following a very strong quarter like December was. So I'm just wondering what's sort of causing some of the yield issues that you might be having?

This is a different issue than what you're describing. This is -- as our customer quality requirements increase, we have to be more and more careful that what we ship is suitable for their use. We've gotten better over time at managing the quality and consistency and limiting variability in our supply chain, but periodically, we'll produce something that we recognize doesn't meet the high quality standards of our customers, and so that's expensed as kind of an off-quality product. And so, this quarter, we saw a bit of an uptick in that. Again, it's a means we do to protect our customers, make sure that they only get the best quality products.

So there might have been something that was sort of out of spec, or was there any issues with like changing a key supplier, whether it be, you know, whether it be the silica particles or something that might have contributed to that? Or weather or anything like that, or is just something that you feel like is in control now and probably goes away going forward?

Yes. Bill and I both answered that question at the same time.

It wasn't related to key suppliers, kind of one-off. You know, what happens in our business is every year, our customers come back to us and narrow the specifications on the products that we've been -- you know, legacy products that we've been selling to them, in some cases over 10 years. And we respond to that by improving our process and driving variability out. But we also have another process that Bill talked about, protecting our customers, where we're very careful about not shipping anything that would be even perceived as close to off-quality. And that was the situation that Bill described in this particular instance.

Got you. Okay.

Just sort of following up on that. Six Sigma's been one of the key initiatives you've had in place, and that's all about, you know, improving these processes and narrowing the variability. Do you feel like those programs, at least in the manufacturing environment, are sustainable to help continue to drive yield improvements, even as the customer mix becomes sort of more fragment in terms of their customization needs?

Well, we continue -- you know, every year we've had significant productivity advancements. And our operations group is very good at starting the year with an established -- what they call a productivity deck of projects that drive costs out and increase productivity. As you can imagine, we started this six years ago, so we've kind of caught all the big fish and we're down there trying to catch the littler fish now. But these guys and gals are always creative and always find new opportunities, and so we think there's -- there's some runway left here to continue to improve our yield and continue to drive more productivity in our system.

The productivity results have been really astounding. You may remember from -- we had some Investor Day material last June that showed in excess of a 90%, 90% reduction in variability over about the last five years, and you can find that out on our website. So the results have been really very striking.

Okay. Thanks, guys.

Thanks, Chris. We'll take our next caller, please.

The next question comes from the line of Paul Leming from Soleil Securities. Please proceed, sir.

Good morning, and thanks for taking my questions. I've got two.

First, I'd like to push beyond the current quarter and just ask if you feel like you have any visibility into the second half of the calendar year in terms of wafer starts and IC shipments. I think there's a lot of capacity coming on in the second half of the year, in memory and foundries in particular. Are you seeing that capacity ramp really being reflected in discussions with your customers now, or is everybody throughout the supply chain just kind of literally living week to week, month to month, wrestling with all of the uncertainty that is out there in the world? That's question one.

Second question, could you just discuss your thinking and the Board's thinking on dividends at the present time? Thanks.

Okay. Paul, the question I think that you ask is one that we at Cabot Micro don't tend to answer, because we don't have the visibility and transparency that you would like to us have or we would like to have. You know, we pay attention to some of the industry analysts that are out there that we think are perhaps closer to the customers in terms of forecasting. We use a company called IC Insights pretty strongly, and we listed to what they have to say. And they -- in general, they're talking about sort of 5% to 8% growth for the year, and we have no reason to not believe that. I agree with you, there's a lot of capacity coming online right now. Certainly, the companies that are offering capital equipment to the industry are benefiting from a lot of capital expenditure right now.

But we can't predict the second half of the year. As I said earlier in my comments, we started this year optimistic. We remain optimistic about the full fiscal year. And like everybody else, we're trying to dig throughout pile of information that's out there to make sense of what we're hearing and seeing.

The second question, on dividends, I think. We meet with our Board every quarter, and we talk about our cash balance and the best uses of cash. You know, we continue to think the best use of cash for our Company today is look for opportunities to grow profitably. We've made a couple of acquisitions, the last one being Epoch in South Korea -- or, I'm sorry, in Taiwan, the southern part of Taiwan, and we're delighted with that acquisition. We think it was a really good use of capital, and it's clearly enhanced the strength of our Company.

So we continue to look for opportunities like that to utilize our capital. That's our first priority. And our second priority is to return cash to shareholders. Today, we've been doing that with buybacks. We will continue to revisit the dividend issue as we go forward, and if we think that makes sense and that's what our shareholders would like to see, we'll consider it. But right now, our path is to pursue buybacks as a way to return some of that growing cash balance.

Fair enough.

If I could go back to the first question and just try and maybe ask it -- I hope I'm asking it a little bit differently. I really don't want to try and pin you guys down to a forecast. I'm just wondering if you would say that the tone, the tenor of discussions with your customers, looking a bit further out into the second half of the year, it is a very uncertain environment out there, and I'm just wondering whether or not you sense any difference at your customer level as to how they are thinking about the second half of the year, given all of the cross-currents out there in the world?

I haven't heard anything that I would describe as materially different than what we heard at the start of the year. I think -- I'm talking specifically about our very large customers, and I think they're all fairly bullish on the year. I have seen nothing that really causes me to think we're going to see a drastic downturn or a shift in where we're headed. But that's -- you know, that's kind of it. That's a very qualitative answer to your question. Like I said, I think we remain optimistic about the strength of the semiconductor industry and the strength of Cabot Microelectronics and that we think we're going to have another great year.

That was the kind of color I was looking for. Thanks very much.

Thanks, Paul. We'll take our next caller, please.

And the next question comes from the line of Rob Crystal of Goldman Sachs. Please proceed.

Hi. My questions have been answered. Thank you.

Thank you.

Thanks, Rob.

Okay. We'll take our -- we have time for one last caller, please.

And your final question comes from the line of Jay Harris of Goldsmith & Harris. Please proceed.

I wonder if you could comment on geographic changes or dislocations and where your business is coming from as a result of the Japanese problems?

Sure, Jay. We'll give it a shot.

And this is not new. The Japanese semiconductor industry started about -- almost two years ago started to go down the road of fab light and fab less and began to shift some of their production to the foundries in Taiwan and China, as well as Singapore and some of the other foundries around the world. That trend will -- would have and will continue, regardless of the tsunami and the earthquake. Most people believe that, and I think if you read some of the analyst coverages, most people see that. So that trend, you know, the shifting from Japan to Taiwan, in some cases it's neutral to us, because we were selling to those customers anyway and those sales just shift from one geography to another. They move from Japan to one of the foundries, and as you know, we have a very strong position in the foundries. So, that's kind of a net. It just moves the revenue from one region to another.

You know, the outcome of the tsunami and the earthquake is, some of our customers have fabs that are damaged and haven't started up yet. I think it's too early to call what the net impact will be on Cabot Micro and the industry. But we'll just have to wait and see where that ends up. But in general, the shift -- in general, the overall market is shifting to sort of a fab light, fab less model. And these are big guys, like TI and Micron have shifted to that model as well. And we think that trend will continue, and we hope to be well positioned to benefit from that trend, both in Taiwan and in our investment in South Korea and our other investments around the world.

And the purchases of wafers for R&D, how many quarters before you'll make another purchase again?

We make purchases periodically and are sometimes opportunistic in terms of what pricing we can get. And so it's not very predictable. Tends to be as needed. We don't maintain a large inventory, but sometimes we'll buy larger amounts if we can get better pricing.

On the quantities that you purchased, I guess in the December quarter, what's the burn rate on that?

I don't know the answer to that offhand. If you -- you've followed us a long time, and periodically, we've talked about fluctuations in operating expense due to higher or lower laboratory materials. But I don't have a sense of -- to put that in greater context, but it was -- had an effect -- an impact on our operating expense this quarter.

I really ask that question because of the next one. A number of wafer manufacturing activities in Japan have been shuttered because of events there. The initial feedback was that fabs generally had good inventory levels. Do you have a sense of when the output from the Japanese facilities is likely to resume and how that compares to your customers' inventories of wafers that they're consuming at this point in time?

No, Jay. My answer to that is no, not really.

We're watching like everybody else. That was the main area in the supply chain that people pointed to as a -- potential shortages, and it was leading-edge 300 millimeter wafers. I think the last report I read suggested that the wafer factories in Singapore had picked up a lot of the slack, as well as the wafer factories in North America and Europe. But I can't tell if you they've closed the gap or when those -- I think there's two factories that are shut down in Japan -- when those factories will start back up again.

What sized wafers are going to be in most demand as new capacity comes on stream?

300 millimeter wafers. Nobody builds anything but a 300 millimeter wafer factory now.

All right. Thank you.

You're welcome.

Thanks, Jay.

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