CMC Materials, Inc. (CCMP) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter Cabot Microelectronics earnings conference call. My name is Kim, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (Operator Instructions) I will now turn the presentation over to your host for today's conference, Trisha Tuntland, Investor Relations Manager. 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 third quarter of fiscal year 2011, which ended June 30. 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 comments will be available on our website.

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 second quarter of fiscal 2011 ended March 31, 2011, 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, Trisha. Good morning, everyone, and thanks for joining us. This morning, we announced solid financial results for our third fiscal quarter of 2011, including revenue growth of 10% compared to the same quarter last year, a gross profit margin of 47.4% of revenue, and earnings per share of $0.54. We believe our solid revenue and earnings growth this quarter reflect continued execution against our strategic initiatives, and sustained growth in the semiconductor industry.

On a year-to-date basis, we're also proud to have achieved revenue growth of approximately 13%, and earnings per share growth of 23% over the record level of performance we achieved last year. After approximately eight consecutive quarters of relative strength for the semiconductor industry, reports and comments by certain industry analysts and some customers indicate that there appears to be some softening of demand within the industry.

At SEMICON West earlier this month in San Francisco, they mentioned a couple of factors as possible contributors to the softness they forecasted, including a potential modest correction of IC inventory and general ongoing macroeconomic uncertainty. To be clear, these cautionary sentiments were all about near term softness in demand with more modest growth than previously expected, but not a downturn.

For example, IC Insights, a leading semiconductor market research company, now projects unit growth for calendar year 2011 of 7%, down from its prior forecast of 8%. This continued positive, although more muted outlook, is based on expectations for continued strong demand of consumer products such as smartphones and tablets. We believe that these semiconductor unit growth projections, coupled with continued consumer demand, in what is typically a historically strong fourth fiscal quarter for our Company, will contribute to solid financial results for us for the full fiscal year.

Turning now to Company-related matters, we continue to execute on our strategy to strengthen and grow our CMP consumables business, as well as our advanced engineered surface finishes business. As the leading supplier of CMP slurries, we're committed to our Company's mission and vision, in which we strive to be the trusted industry partner, collaborating with our customers to provide solutions to meet their ever increasing performance requirements.

For example, our development teams are collaborating with our customers, and generating innovative products and solutions that are designed to meet their high quality and performance requirements, and lower their total cost of ownership. This includes products for the most advanced nodes including 32-nanometer through 14-nanometer technologies. As a result, our new product pipeline is robust, and it includes product development projects for a wide range of application areas and nodes. We are currently pursuing more than 30 new product introductions that span the entire spectrum of CMP slurry applications, including established applications, as well as emerging areas such as slurries for polishing High-K Metal Gates that utilize Aluminum CMP, through-silicon via applications, and Post-CMP clean solutions.

We have a relatively new program to develop state-of-the-art Post-CMP cleaning solutions, which we refer to as the EPOCH clean series to deliver optimal Post-CMP wafer surface properties. We're pleased with the ongoing, high level of customer interest since the inception of this program, and we are excited that multiple purchase orders have been received from leading edge Asia foundry customers and US integrated device manufacturers.

Another example of our commitment to being a trusted industry partner is visible in our data storage business. We continue to work closely with data storage customers in the Asia Pacific region to quickly develop products and solutions to meet their needs. During our third fiscal quarter, we launched two new data storage products, and are currently in qualification process with customers for a number of new business opportunities. In response to the growth we are experiencing in this area of our business, we're expanding our manufacturing capacity for data storage products during the third fiscal quarter. We believe this additional manufacturing capacity will not only support continued growth in customer demand, but will also lower our unit costs.

Our success in our pads business is another example of how we continue to partner to provide innovative solutions. Our pad development activities are focused on providing high quality products with longer pad life and lower defectivity, which we believe translate to significantly lower cost of ownership for our customers. We continue to develop both our original D100 and our next generation D200 platforms, in order to expand our pad product offerings.

We are pleased to report that during the third fiscal quarter, we won additional D100 pad business with an existing pad customer for a new copper application at the 28-nanometer node. During the quarter, we began to see the initial impact of this win, and we believe volume will gradually increase quarter-over-quarter. We believe this new business win strengthens our competitive position at this customer for all copper technology nodes, from 130-nanometer to 28-nanometer technology.

Up to now, all of the growth in our pad business has been through our D100 pad platform, and we continue to sell products within this family to approximately 25 customers. We also continue to commercialize our next generation D200 pad platform, which we expect to drive additional growth in our pad business. We can tune the D200 platform by adjusting the porosity, pore size and hardness of the pad to meet a wide variety of customer needs, especially for applications requiring very low defectivity.

During our last earnings call, we announced our first commercial business win with our D200 pad technology. I am pleased to report that in addition to this win, we are now sampling our D200 pad products to approximately ten prospective customers, and several of these customers are evaluating this product across multiple applications. A number of these potential business opportunities are at the leading edge technology nodes. We believe the opportunity pipeline for our D100 and D200 pad platforms is healthy, with more than 50 opportunities combined across the Asia Pacific, Europe, and North American regions. We look forward to partnering with these customers, and transforming these opportunities over time into new business results for our customers and our Company.

We're also very pleased with the strong performance of our engineered surface finishes business, which is primarily due to increased demand for our QED products and services. QED is currently on track to report record revenue during fiscal year 2011.

I would now like to provide a brief update of our new research, development, and manufacturing facility in South Korea. The construction of this facility, which began in December 2010, is nearly complete, and the grand opening is planned for the end of August. We expect to begin customer qualifications in South Korea during the first quarter of fiscal 2012. We believe this facility will enable us to collaborate more closely with important memory customers in South Korea, and we are confident that this investment will further strengthen our global competitive position, and contribute to the Company's continued profitable growth.

The expansion of our facility in Japan is also on schedule to be completed during the fourth quarter. We believe, similar to the expansion of our data storage business, that this additional manufacturing capacity will support continued growth in customer demand, and help to lower our unit costs.

Concluding my prepared comments today, despite analyst expectations for a near-term softening in semiconductor industry demand, which we would presently characterize as representing more modest industry growth for the year and not a downturn, we remain optimistic about our performance for the full 2011 fiscal year. We continue to execute against our strategic initiatives to achieve our vision to be a trusted industry partner, providing high quality solutions with speed, and delivering superior cost of ownership. We believe this approach, and in particular our investments in product development and manufacturing capacity, will continue to position us for sustained future growth and higher earnings potential. And with that, I will turn the call over to Bill.

Thanks, Bill, and good morning, everyone. Total third fiscal quarter revenue of $111.8 million, represents a 10% increase from the $101.7 million reported in the same quarter last year, and a 2% increase from $109.7 million last quarter. The increase in revenue from the same period last year reflects continued solid demand for our Company's products, with all business areas showing revenue increases except for pads.

Compared to the prior quarter, revenue for each of our CMP slurry application areas except data storage increased, and revenue from our pads and engineered surface finishes or ESF business areas decreased. Year-to-date revenue of $335.7 million represents an increase of 12.7% from the prior year, driven by double-digit growth in our CMP slurry and ESF businesses, and continued growth in pads.

Drilling down into revenue by business area, tungsten slurries contributed 36.6% of total quarterly revenue, with revenue up 13.6% from the same quarter a year ago, and 1.6% sequentially. Sales of copper products represented 18% of our total revenue, and increased 3.6% from the same quarter last year, and 3.1% sequentially. Dielectric slurries provided 27.7% of our revenue this quarter, with sales up 1.5% from the same quarter a year ago, and up 4.2% sequentially. Data storage slurry products represented 6.1% of our quarterly revenue. This revenue was up 43.1% from the same quarter last year, and down 1.6% sequentially.

Sales of our polishing pads represented 6.8% of our total revenue for the quarter, and decreased 3.3% from the same quarter last year, and 2.1% sequentially. Our pad sales volume is up sequentially, and year-over-year. However, a change in product mix contributed to the modest decrease in revenue.

Finally, revenue from our ESF business, which includes QED, generated 4.9% of our total sales. ESF revenue was up 73.8% from the same quarter last year, as a result of several new machine orders, and down 0.4% sequentially. As Bill mentioned earlier, QED is on track to achieve record revenue for fiscal year 2011.

Gross profit, expressed as a percentage of revenue was 47.4% this quarter, which is lower than the 49.1% reported in the same quarter a year ago, and 48.1% last quarter. Compared to the year ago quarter, gross profit percentage decreased primarily due to foreign exchange rate changes, and in particular, the weakening of the US dollar versus the Japanese yen and selective price reductions, partially offset by a higher valued product mix.

The decrease in gross profit percentage versus the previous quarter, was primarily due to lower yields in the Company's manufacturing operations and increased fixed manufacturing costs, partially offset by reductions in certain variable manufacturing costs. Year-to-date, gross profit represented 48.6% of revenue, which is consistent with our full-year guidance range of 48% to 50% 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 were $33.4 million in the third fiscal quarter, or $1.1 million less than the $34.5 million reported in the same quarter a year ago, driven primarily by lower professional fees. Operating expenses were $0.1 million higher, than the $33.3 million reported in the previous quarter.

Year-to-date, total operating expenses were $99.7 million or 29.7% of revenue, which is 2.9% higher than during the same period last year. We continue to expect our full-year operating expenses to be within a range of $130 million to $135 million for fiscal 2011. Diluted earnings per share were $0.54 this quarter, which is up from $0.43 reported in the third quarter of fiscal 2010. Year-to-date, diluted earnings per share of $1.80 were up 23.3%, compared to last year.

Turning now to cash and balance sheet related items, depreciation and amortization expense was $5.9 million, share-based compensation expense was $2.7 million, and capital spending for the quarter was $11.5 million. We continue to expect our full-year capital spending to be about $35 million, which is a relatively high year for our Company, primarily due to our expansions in South Korea and Japan. In addition, we purchased $15 million of our stock during the quarter under our $125 million share repurchase program. We ended the quarter with a cash balance of approximately $293 million, and no debt outstanding.

I will conclude my remarks with comments on recent orders. As we observe orders for our CMP consumables products received to date in July and we expect to ship by the end of the month, we see July results trending approximately 5% lower than the average rate we saw in the June 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 will turn the call back to the operator, as we prepare to take your questions.

(Operator Instructions).

Your first question comes from the line of Avinash Kant from D.A. Davidson & Co. Please proceed.

Good morning. A few questions, Bill. First, on -- could you talk a little bit about you said there was gross margin impact because of lower yields. What is that about? Could you explain that a little bit?

Avinash, if you recall last quarter, we talked about four factors that resulted in a sequential reduction in gross margin in our fiscal second quarter. And one of these was yield, manufacturing yield in our operations. We saw a bit of a continuation of that in this quarter that prompted an additional reduction sequentially in gross margin, wasn't a big factor, but is one of two or three that we mentioned. For us, lower manufacturing yields mean that we've produced a product, that we feel may not work properly in a customer's operations. And so rather than shipping that, we'll keep that within our business and scrap it, or try to rework it. So we saw a bit of a continuation of that in the quarter, and that contributed to the modest decrease in gross profit margin for the quarter.

So, prior to the quarter, you had talked about 48% to 50% being the range for gross margins for the year. Does that still apply for the remainder of the year?

That's right. Year-to-date, we're at 48.6%, and our full-year gross margin guidance stands at 48% to 50%. There is another factor, that I mentioned in gross profit margin, and that was increased fixed manufacturing costs. And throughout our prepared comments, we talked about our expansion in Korea, the expansion -- the new facility in Korea, the expansion in Japan, and also a modest expansion in Singapore.

With those activities, we're investing ahead of revenue. So there is some costs associated with that, either in head count or travel costs to set up facilities, and prepare facilities. So these are on purpose investments that we're making, that we recognize they're going to cause a bit of a drag on gross margin in the near-term, but position us for a -- more success down the road. And those two things contributed to that.

But you would expect the impact from this margin situation should be over in the next quarter, in the September quarter or not?

Well, we have -- in our history we have had periodic times like this, where we have talked about yield issues. And so to the extent that those are corrected, then you would see -- you would expect to see a recovery. Depends upon how long-lived that is, and it is really hard to say. But unlike, for instance, a price reduction or something like that, that is sort of relatively permanent, this is something that is episodic, and no reason to expect it would get worse going forward.

And one more question, and then I will get back in line for more. But the pad business seems to be not growing for two quarters in a row now, and I know you talked a little bit about the mix issue there. How should we think of it going forward?

Well, I think, Avinash, the first point is the pad business actually grows sequentially and year-on-year in volume. We had small decreases in revenue, primarily due to the product mix that we're selling, but the volume continues to increase, both sequentially and year-on-year. I think we remain, and continue to be optimistic about our pad business. Our D100 pad continues to make inroads, continues to penetrate, and continues to demonstrate the value that we market it for. And that is, longer pad life. And we're really excited about where we sit with our D200 technology, and its ability to result in far lower defects than some of the incumbent pads in the applications it is being tested in. So we haven't lost any of our enthusiasm or energy around our pad business. It is, as I said in prior calls, it is a difficult qualification. It takes a long time. It takes a lot of data, and it takes a lot of wafers. But we remain enthusiastic, and excited about our pad business.

Just a couple of additional metrics. We're selling to 25 customers commercially, and we announced a new win at 28 nanometer copper, so leading edge in our D100 platform. And then we have -- we mentioned 50 total evaluations across D100 and D200. And within the D200 platform now sampling with 10 customers. And in the past, we'd characterize that as a handful, so it's -- that's a pretty significant increase there.

Do you think there could be something, that because you have the D200 coming, some of the customers may be waiting on the D100?

No. I think, Avinash, we're targeting the D200 for a different set of applications than the D100. We don't expect a significant amount of cannibalization of the D100 platform by the D200 platform. The D200 is targeted at the intermediate hardness and the soft pad market, where the D100 is more of a hard pad application. So we, again, don't think there will be a lot of cannibalization long-term. We think these two product platforms really position us well to serve the entire pad market, where the D100 only gave us our ability to compete in the hard pad market, which is the vast bulk of the pad market. So it is just a different product family, a different product platform and a different technology targeted at some very specific portions of the pad market.

Perfect. Then I will get back in line later on. Thanks.

Thanks.

Thank you, Avinash. We'll take our next question, please?

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

Good morning, gentlemen. A couple of questions. In reference to the pad business and the declines in it, you talked about mix being a somewhat of a negative. Can you give us a little bit more detail on that? What's the -- I guess I didn't realize there was such a great range in pricing and profitability of the pad business, that mix was that big of a factor. So can you give us a little bit more details on what's going on there?

Well, it's -- in terms of mix there is 200 millimeter and 300 millimeter pads, Dmitry, which are priced at very different price points. And then the way Cabot Microelectronics tends to run our business, we have some very large customers that buy a lot of product from us, and that we give those customers pricing that is competitive. And so when you see both the customer mix and the product mix, they're moving in that direction.

I would add that we entered the market and quickly got to 5% or 6% market share. And that's created a fair bit of competitive intensity around the world, in terms of pricing. We remain committed to our value proposition, and we remain committed to selling that value proposition. But there is a lot of competitive intensity, not just from the historical incumbent, but there is several new entrants in the pad space that are creating competitive intensity. So I think to just be, in full disclosure, that's -- there is a little bit of everything going on here, but this quarter was particularly related to both product mix and customer mix.

Okay. Okay. And then you talked about the lower pricing as one of the reasons for the gross margin decline, along with foreign exchange and impact. Was that just related to pads again, or was there average selling prices in the slurries decline as well?

Yes -- and this -- you're referencing a decrease year-over-year in gross margin, where the biggest factor was foreign exchange related, the weakening of the US dollar versus the Yen. We also mentioned selective price increases. That wasn't a factor sequentially, but it was year-over-year. And you remember last quarter we talked about having made some selective price reductions, mainly in the Tungsten business. And so we saw persistence of that, so year-over-year, that was a factor.

Is that what accounts for your Tungsten business being so much better than copper or dielectric? I mean this is, you expect quarter-to-quarter fluctuations in these businesses, but usually tungsten aligns more with dielectric, than dielectric with copper, in terms of growth. So is the reason for such a strong performance in tungsten on year-over-year basis, the fact that you were able to get some business in lower prices?

I think it's more -- no -- it wasn't -- if you made a price change, you wouldn't see such an instantaneous impact on volume. What we have always seen is sort of variations quarter-to-quarter, and month-to-month in order patterns. And so what you saw is really strong year-over-year growth in tungsten. But this quarter relatively modest year-over-year growth in dielectrics. Conversely, if you look sequentially, there is much stronger growth in dielectrics than tungsten. And no real mix -- or competitive position changes driving that; it's really just more a function of variations in monthly order pattern. But I think the strong memory environment, for example, is driving quite a bit of our tungsten growth.

Okay. So it is the relative strength of memory versus logic, then?

And just the vagaries of month-to-month and quarter-to-quarter order fluctuations.

Secondly, the recovery in the QED business, as we have seen in the ESF business as a result. I know it is a lumpy business, so, I mean, one quarter may not look like the next quarter, but are you seeing kind of the overall pickup in the market? Or was this just a lump of demand that came through during this quarter, and we shouldn't expect this type of strength to continue?

Dmitry, I think it is two things. I think it is just an overall pickup in the capital equipment market. And remember, QED serves a broader market than just semiconductors. They serve general optics, and defense, and digital camera, and research facilities. So it is not totally driven by the semiconductor industry capital cycle.

I think that pickup in the general capital equipment market, combined with some of the new product innovations QED has come up with for some perhaps smaller and more inexpensive focus tools, and some very sophisticated dual process tools. They're getting a lot of attention in the high-end precision polishing market. And it is driving the sale of tools.

So we -- in my prepared comments, I say, we expect QED to have a record year this year. And it looks attractive, given the product portfolio that QED now has, and the products we're promoting, and the capabilities we're promoting in terms of services, which is a new business and part of QED. We're actively developing a polishing services business within QED, to allow people to either supplement their own QED capacity or to do some really intricate and precise polishing applications that they can't do in their own shops. So we have a plan and we have a strategy for QED. This year is going to end up being a great year, and we hope we can grow on it in future years.

Okay. Thank you. Can you give us an idea of what the tax rate is going to be for the year, or in the last quarter, however you want to handle that? Because it has been pretty volatile, quarter-to-quarter this year.

Right. We -- this quarter we are at 33.9%. We're year-to-date, we're at 32.7%. Our expectation in the fourth quarter would be between 31% and 33%.

Okay. And then one final question. You bought $50 million worth of shares. Your share creep continues. You're almost up to 800,000 shares higher this quarter than you were back in December of last year. Any reason you're not being more aggressive on your share repurchase? I mean, are you -- are your numbers telling you that the stock is over-valued or fairly valued, and you're not seeing the return on this investment?

Our approach in our share repurchase over the five or six years we have been doing that is to be relatively constant. When we're in the market, it's in the range of $10 million to $15 million per quarter. We haven't tried to pick prices. There is a limited trading window that we have available, and limited volume. And so there is a volume level above which you might be concerned about influence in the market price. But we have done several share repurchase programs, $15 million under the new program, and we'll continue to report that on an ongoing basis.

The share creep is partially a function of the increase in the share price. The way you calculate shares, fully diluted shares, there is a factor of in the money options that goes into that share count. And that increased our share count, particularly in the second fiscal quarter. And then, it sort of maintained it in the third quarter. So that's a function of past equity awards that had been underwater in the past, and now are in the money. And so, they contribute to that diluted share count.

I understand why the share count is creeping. What I am trying to understand is why you are letting it creep. Since the only thing that you have said about using your share repurchase program is to keep the dilution share -- the diluted share count at kind of a constant basis. But you're not even doing that; I mean, taking it back down to 23 million would have given you another $0.02 in earnings this quarter.

But, Dmitry, this phenomena, this increased share count, as a result of the equity grants is a relatively new phenomena, and it occurred in the last two or three quarters. So I mean, and it's not -- we just can't keep up with it, given that the rules that we're subject to, and buying back our own shares in the market. I just don't think it is fair to accuse us of letting our share count creep. I mean, this happened as a result of our stock price appreciating, and we'll get after it over time. But it has been a problem over the last -- not a problem, it has just been created by the last two or three quarters, where our stock prices has appreciated quite a bit.

Over the past several years, we have actually seen a very modest decrease over a several year period, prior to the share price trending up here recently.

I am not accusing of you letting the shares creep. I am just trying to -- I mean, you're closing on $300 million in cash on hand. I mean, that's your biggest unrealized and unutilized asset that you have as far as I can see. And I am not detecting any sense of urgency on your end to deploy that for shareholder benefit. That's all. That's all the questions I had for today. Thank you.

Thank you, Dmitry. We'll take our next question, please.

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

Great. Thanks for taking my questions. To start, can you talk a little bit about linearity in the June quarter? It sounded, on the last call, like you had a really strong month of April. What do you kind of see from there, as you went throughout the quarter?

We finished the second fiscal quarter with record revenue in March. And then we saw about a 10% decrease in revenue in April, and another 4% decrease in May, but then June was up about 10%. And then we said, that as we look at orders in July, we're about 5% below the average of that June quarter on orders of CMP consumables through the 3.5 weeks of the month.

Okay. Okay. Great. Do you mean, do you think, as you look back in hindsight, do you think what you saw in March and early April, was to some extent people building buffer after the Japan earthquake? And that what you saw, and maybe still seeing, is some correction of that, or do you think there is not an inventory dynamic at play?

Yes, we think there is a small inventory correction taking place right now. I think part of it is, it's a result of the tsunami and earthquake. It's also a result of the current macroeconomic uncertainty around the world. Or I think people are just being cautious with capital and inventory in this environment of uncertainty.

It is interesting. As early as Monday of this week, Digitimes had an article about increased orders at TSMC, from Nvidia, Broadcom and Qualcomm, which is good news. And it's different news than we heard at SEMICON West, and I would remind everyone, SEMICON West is pretty much of a -- an equipment show, and focuses on capital equipment. And I think the capital equipment market is seeing sort of a downturn in capital spending by all the major customers, which we're not sure is going to translate into decreased wafer starts in the near term. Certainly, if they don't add capacity, it will translate to decreased starts in the long-term. But in the short-term we're not sure, and we still think that the remainder of our -- certainly, our fiscal year will be attractive, and we'll end the year relatively strong.

And then on the pad business, I mean, I struggle a little bit. I mean, it seems like you're the newer entrant, and you have been gaining share. And given -- as you were ramping up, at first, kind of, when I would ask why you weren't growing faster, you'd say it's because everybody is so tight, that they can't kind of spare capacity to do qualifications. Now that the industry has loosened up, I mean your growth has really slowed in the pad business. I mean it -- is the pad market just less attractive a market than you would have thought, twelve or eighteen months ago, because of this degree of competitive response you have seen? Or is this just, even as you ramp up, we shouldn't expect this to be that fast a growth market for you?

No. I think my answer to that question is if you went back and watched our history with D100, there were several quarters there where we sputtered. And it took us much longer than we had expected. I think we still see the pad business as a very attractive incremental market for Cabot Microelectronics. It is a market where we think we bring unique technology and all of the infrastructure of Cabot Microelectronics to the market.

I want to be clear. In my prepared comments, we talked about the amount of work we're doing with the 10 new customers we have on D200, and their work to evaluate that product and qualify it in several different applications, as well as the ongoing activity in D100. We think we're in a solid position. I think these quarter-to-quarter fluctuations are -- it's just -- it's like growing into a new market. There is going to be quarters when we don't make progress, and there is going to be quarters where we make a lot of progress. And if you observe our performance over the years, we tend to grow in these little step functions. It is not as linear as maybe people would like it. And we get a big win in a customer, and it is a step-up in revenue. And it just doesn't -- it just isn't as linear as some other business might be.

Okay. Okay, great. Thank you.

Thank you, Aaron. We'll take our next question, please.

Your next question comes from the line of Paul Leming of Ticonderoga. Please proceed.

Good morning, and thanks for taking my question. I've got two to start with. First, I'd like to just ask a kind of broad, top-down question about what you see going on in the semiconductor industry? And I think I heard you say a minute ago, you think there is a bit of an inventory correction going on. If you look across a range of the semiconductor companies that have reported for the June quarter, and given guidance for the September quarter, there really is a very wide range of guidance out there.

You have got a couple of companies that have guided to down 5%, 6%, 7% on revenues for the September quarter. And I am just wondering if you are seeing pockets of what I'd call real weakness in some of your semiconductor customers? Is the semiconductor market looking at a very fragmented end demand environment? As you talk about an inventory correction, does it really extend across the entire customer base, or are you really seeing some segments much weaker than other segments at this point?

Paul, that's a great question. Let me put out my disclaimer before I try to answer it. We don't claim to have any enhanced visibility into what's going on. I can tell you what we believe and think. There's -- let me describe it this way. I have come to think of it as the Apple impact. Apple is wielding a lot of share right now, and they're moving it around. And they're in a position to create winners and losers, because their volume is growing to such a high level.

So we see, like within sectors, so we see, for instance, winners and losers in the Foundry segment. And we see winners and losers in the Memory segment as well. And because of the result of this share being moved around, and Apple sort of wielding their shares across the industry, it is hard -- and I think it is very hard to put a finger on it. I think what you are seeing is the result of that, and some semiconductor customers are reporting a decreasing in revenue, and others are reporting increases and strengthening. I just think it is because share is moving around in the industry right now.

This report that I refer to earlier in my comments, from Digitimes about TSMC receiving increased orders from many of the big fabless companies, I think that's just an indication of TSMC's strength in the Foundry segment. And you can compare that with some of their competitors and their releases going forward. So I think that's the way we think about what's happening right now. This is a really interesting period of ambiguity and uncertainty, into what the outcome will be. But there's clearly going to be winners and losers over the next two quarters, in terms of share and capacity utilization.

If I could just follow up on that, and kind of move away from the share discussion, which I think is a very helpful way to think about it. But the concern I have got, is last night we saw very weak guidance out of Linear Technology for the September quarter; Microchip came out a week or 10 days ago, and talked about a very weak September quarter. And the one commonality both of those companies have is a very broad industrial customer base. And again, I recognize you don't profess to have any insight into these final end market drivers, but I am just curious if you are seeing any signs that lead you to concern about a broader based downturn beginning to gather some momentum, as opposed to these share gains that you talked about?

Well, Paul, I mean if I could predict that, I probably wouldn't be here. I think -- listen, the customers that I talk with and have spent time with, everybody is concerned about what's happening in the world right now. Everyone is concerned about what's happening with the US and the debt ceiling, and how that will play out, and what that means. And some of the countries in Europe, as we're all aware of, that are struggling, and I just think it is created a lot of uncertainty.

On the other side, people continue to buy tablets and smartphones and flat panel TVs, and all these things that are driving semiconductor wafer starts. And Apple's results are clearly out there, and they're putting pressure on some of the other smartphone manufacturers in the world. And so, like I said earlier, those shares are shifting around, and there is winners and losers. It is the people that have hitched their wagon to Apple's horse are going to be winners, and some of the others are probably not going to win quite as much.

So I think for us, we're a little small Company in this supply chain. I think it is hard for us to see where this all goes. I just think we watch what everybody else watches. And we're in the -- and again, we're in this period of uncertainty that needs to settle down, and when that happens, I think we'll know where it is going to all go. But right now (multiple speakers) --

Fair enough. Let me -- if I can, let me go from the 40,000 foot level to the two foot level. As I just do a truly quick and dirty back of the envelope calculation, of kind of net income plus depreciation and amortization plus share-based compensation, and then take out CapEx and shares, that quick read says you should have consumed a little cash in the quarter, and you were up $14 million in the quarter. Can you just talk about where the big surge in cash did, in fact, come from? Is it an absence of tax payments in the quarter? I haven't gone through working capital yet. Did it all come out of working capital? But could you flesh out where the surge in cash did originate?

Yes. There was a change in working capital. I think our working capital decreased by about $6 million. We had some cash infusion from option exercises of about $4 million, so that was about $10 million between those two. The other big factors are pretty constant. I guess we had capital spending of $11.5 million, but some of that was accrual of liabilities associated with the capital projects. I think there is, even though we had capital spending of $11.5 million, actual capital additions were only about $8.5 million, so there's another $3 million or $4 million of cash there, by increased payables. But I think that, when you see more of the detail in the Q, you'd see more of the in's and out's on working capital. And I think that's the piece you're not capturing.

That absolutely closes the loop. Thanks very much.

Thank you, Paul.

Thanks, Paul. That was our last question. Thank you for your time this morning, and your interest in Cabot Microelectronics. We look forward to the next opportunity to speak with you.

Thank you for your participation in today's conference. This concludes the presentation. Have a great day.