CMC Materials, Inc. (CCMP) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the quarter four 2011 Cabot Microelectronics earnings conference call. My name is Ian, I will be your operator for today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) Now, I'd like to turn the call over to miss Trisha Tuntland, Manager of Investor Relations.

Good morning. With me today are Bill Noglows, Chairman and CEO, and Bill Johnson, Chief Financial Officer.

This morning we reported results for our fourth quarter of fiscal year 2011, which ended September 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 a script of this morning's formal comments will be also 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 third quarter of fiscal 2011 ended June 30, 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 operational results for our fourth quarter and strong results for full fiscal year 2011. During the fourth quarter, we reported revenue of $109.7 million, gross profit margin of 46.4% of revenue, and earnings per share of $0.40. For full fiscal year 2011, we achieved record annual revenue of $445.4 million, gross profit margin of 48.1%, and record earnings per share of $2.20. This record revenue represented 9% growth for fiscal year 2011 on top of the 40% revenue growth we achieved in fiscal year 2010.

Fiscal year 2011 was highlighted by strategic investments we made to further strengthen our global position. During the year, we expanded our global footprint, added more technical capabilities in the Asia-Pacific region, and enhanced our new product pipeline. We believe these investments will serve us well as we continue to collaborate closely with our customers around the world and provide differentiated solutions to meet their ever evolving business needs.

We executed a relatively aggressive capital investment program in 2011, which included a new research, development, and manufacturing facility in South Korea, as well as expanding our manufacturing capacity in both Japan and Singapore.

Less than a year after breaking ground, we celebrated the grand opening of our new facility in South Korea in August. We believe this capital investment will enhance our manufacturing and technical capabilities in the region and will strengthen our ability to serve the second-largest CMP consumables markets in the world.

We are currently closely collaborating with key customers in South Korea to qualify certain advanced dielectric products, and we expect to continue making progress on these qualifications during the first quarter of the current fiscal year.

We also expanded our manufacturing capacity in Japan to meet increased demand for our CMP slurry products. Our manufacturing facility in Japan is our largest plant, supplying our customers in Japan, as well as our customers throughout the Asia-Pacific region.

Finally, during the year we invested in the expansion of our slurry manufacturing facility in Singapore to meet higher demand for our data storage customers. Our data storage business had an outstanding year in fiscal 2011 with record annual revenue of approximately $28 million, 34% higher than last year. This facility expansion will allow us to continue to meet the growing demand in the data storage market, which is closely adjacent to our core CMP consumables business for IC applications.

I would now like to review the strategic investments we made during 2011 in terms of innovating and commercializing new products. We are proud that during the fiscal year we developed new products in all of our business areas to address more traditional CMP applications, as well as new and emerging areas. The high-quality solutions we introduced this year address a broad range of applications and technology nodes.

In the first half of the year, we introduced new D100-based pad products for advanced copper, shallow trench isolation, and tungsten applications and developed next-generation D200 pad products that are tunable to meet specific customer needs. Our D100 pad products continue to gain customer adoptions for existing and new applications. This is demonstrated by the new D100 pad business we won for copper and pre-metal dielectric applications during the fourth quarter.

You may recall that during our second fiscal quarter, we announced our first business win for our D200 pad for an advanced node tungsten buff application. In addition, our D200 pad products are currently being evaluated by approximately 10 potential customers for multiple CMP applications. On a combined basis, we continue to have more than 50 opportunities for our D100 and D200 pad products around the world, in various stages of evaluation or qualification. We look forward to continuing to transform these customer evaluations into customer adoptions in the future.

On the CMP slurry side, during the year, we introduced an aluminum CMP slurry, through-silicon via or TSV solutions, for various applications, 2 new data storage products, and new solutions for post- CMP cleaning applications. We continue to develop and evaluate other CMP slurry products, such as in our advanced dielectrics business for bulk oxide and polysilicon applications.

We're also involved in several joint development projects for other slurry applications related to advanced technologies and emerging applications 22 nanometers and smaller.

We saw returns on some of these product development investments in the fourth quarter with new business wins for aluminum, copper, TSV, and post-CMP cleans. We believe the investments we made in new product development for CMP slurries this year and in the preceding years will continue to generate revenue and earnings in the future as customers adopt our high-performance, high-quality products.

As I the mentioned earlier, we achieved record annual revenue during fiscal year 2011. However, we are somewhat cautious regarding demand trends in fiscal year 2012 due to our limited visibility into our customer demand patterns, broader semiconductor industry trends, and the continuing uncertain global macroeconomic environment.

The softness in demand that we experienced during our third fiscal quarter continued through the fourth quarter, and some industry analysts currently project that softening in demand may persist into the first half of fiscal 2012. In addition, I see inventories appear to be at the higher end of normal levels, and recent updates from the foundries indicate that overall capacity utilization may be as low as 60% to 70%.

To conclude my remarks today, I am pleased with the strategic investments we made during the year, which we believe will continue to strengthen our global position for the future. I am confident that these investments will serve us well as we continue to collaborate with our customers around the world and provide high-value solutions to meet their ever evolving business needs.

We remain mindful of the uncertain macroeconomic outlook and recent semiconductor industry trends. Moving into fiscal 2012, we intend to continue to proactively manage our business activities and respond quickly to changing trends. And, the ongoing execution of our strategy is to strengthen and grow our core CMP consumables businesses.

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

Thanks, Bill.

Total fourth fiscal quarter revenue of $109.7 million represents a 0.5% decrease from the same quarter last year and a 1.9% decrease from the prior quarter. We believe the decreases in revenue from the same quarter last year and the prior quarter primarily reflect softening in demand within the global semiconductor industry.

Total revenue for the full fiscal year was $445.4 million and a record level for our company, which represents a 9.1% increase from fiscal year 2010. Revenue from each of our CMP slurry business areas, CMP polishing pads business, and engineered surface finishes business increased from the prior year.

In fact, we achieved record annual revenue in our tungsten, dielectric, copper, data storage, pads, and ESF business areas. Full year revenue grew in each geographic area in which we operate, except for Japan. Sales were especially strong in South Korea, where our revenue grew approximately 32% compared to last year.

Drilling down into revenue by business area, tungsten slurries contributed 37.4% of total quarterly revenue with revenue up 1.6% from the same quarter a year ago and 0.3% sequentially. For the full year, tungsten slurry revenue increased by 11%.

Sales of copper products represented 14.7% of our total revenue and decreased 23.1% from the same quarter last year and 19.6% sequentially. The decrease in revenue is primarily a result of reduced demand from some of our foundry customers. For the full year, our copper product revenue increased by 0.5%.

Dielectric slurries provided 27% of our revenue this quarter, with sales down 6.6% from the same quarter a year ago and down 4.5% sequentially. For the full year, dielectric slurry revenue increased by 3.5%.

Data storage products represented 6.2% of our quarterly revenue. This revenue was up 39.5% from the same quarter last year and down 0.4% sequentially. For the full year, revenue for data storage slurries increased by 33.5%.

Sales of polishing pads represented 6.7% of our total revenue for the quarter, and decreased 10.2% from the same quarter last year and 2.2% sequentially. For the full year, polishing pad revenue was up by 3.8%.

Finally, revenue from our engineered surface finishes or ESF business, which includes QED, generated 7.9% of our total sales. Our ESF revenue was up 113% from the same quarter last year and up 60.4% sequentially. For the full year, ESF revenue increased by 51.3%.

Our gross profit this quarter represented 46.4% of revenue, compared to 48.7% in the same quarter last year and 47.4% last quarter. Compared to the year ago quarter, gross profit percentage decreased primarily due to higher fixed manufacturing costs, foreign exchange rate changes, particularly with respect to the US dollar versus the Japanese yen, and selective price reductions, partially offset by a higher valued product mix.

The adverse effect of foreign exchange rates reduced gross margin by 1.6 percentage points. The decrease in gross profit percentage versus the previous quarter was primarily due to increased fixed manufacturing costs and foreign exchange rate changes, which accounted for 0.7 percentage point reduction, partially offset by reductions in certain variable costs.

For the full fiscal year, gross profit represented 48.1% of revenue, which is within our full fiscal year guidance range of 48% to 50% of revenue. Gross profit margin decreased from 49.9% of revenue in fiscal 2010, primarily due to higher fixed manufacturing costs, foreign exchange rate changes, which accounted for a 1.5 percentage point reduction, and selective price reductions, partially offset by a higher valued product mix.

For full fiscal year 2012, we expect our gross profit margin to be within the range of 46% to 48% of revenue. Compared to 2011, the gross profit margin guidance for this fiscal year reflects continued adverse impacts of foreign exchange rate changes, fixed costs associated with our new South Korea facility, and uncertainty within the semiconductor industry and global economy.

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 $34.1 million were $1.4 million higher than the same quarter a year ago. The increase was driven primarily by staffing-related cost and foreign exchange rate changes, partially offset by lower professional fees. Operating expenses this quarter were $0.7 million higher than in the previous quarter.

For the full fiscal year, total operating expenses were $133.7 million, which is within our guidance range for full fiscal year 2011 of $130 million to $135 million. Operating expenses were $4.2 million higher than fiscal year 2010, primarily due to higher staffing-related costs and foreign exchange rate changes, partially offset by lower professional fees.

Looking forward, we expect our operating expenses for full fiscal year 2012 to be in the range of $135 million to $140 million. Diluted earnings per share were $0.40 this quarter, including an adverse impact of approximately $0.06 associated with a higher quarterly effective tax rate.

The effective tax rate in the fourth fiscal quarter increased due to factors related to share-based compensation expense, primarily stock option exercises during the year, and taxes related to our company's foreign income. The net effect of the higher quarterly rate increased our annual tax rate from 32.5% in fiscal year 2010 to 34.5% in fiscal year 2011.

Our earnings per share this quarter were down from $0.66 in the fourth quarter of 2010 and down from $0.54 reported in the previous quarter. Diluted earnings per share for the full year were $2.20, which is up from $2.13 in fiscal 2010. Our earnings per share this year represents a record for the company.

Turning now to cash and balance sheet related items, capital additions for the quarter were $10.7 million, bringing our full year capital spending to $33.4 million, which is slightly lower than our full year guidance of $35 million. For fiscal 2012, we expect capital spending to be between $25 million and $30 million.

Depreciation and amortization expense for the quarter were $6 million, and share-based compensation expense was $2.7 million. In addition, we purchased $14.1 million of our stock during the quarter. We ended the quarter with a cash balance of approximately $302 million, and have no debt outstanding.

I'll conclude my remarks with a few comments on recent sales and order patterns. Examining revenue patterns within the 3 months of our fourth fiscal quarter, we saw demand for our CMP consumables products in July and August at roughly the average of the 3 months and our June quarter. Then, we saw a roughly 15% reduction in CMP consumables sales in the month of September.

As we observe orders for our CMP consumables products received to date in October that we expect to ship by the end of the month, we see October results trending modestly higher than the rate we saw in September. 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. (Operator Instructions).

Avinash Kant, D.A. Davidson & Co.

Good morning. A few questions, more related to the trend that you talked about, Bill. So, you saw the September as a month being down 15% from what you had seen in the first 2 months of the quarter, right? And when you say modest uptick, you are talking about less than 5% uptick from there?

Yes, that would qualify as a modest uptick, that's correct.

Okay. And how do you say the visibility is going into -- typically, how much visibility do you have, and how much do you have right now?

Avinash, we have, what I would consider fairly limited visibility. I think what we're doing is we're watching 3 specific trends, and that would be the holiday-related demand that we typically see this time of year, the typical seasonality in the business. The second one would be inventory and the supply chain, and the third one is the same one everybody is watching, it's just the general global macroeconomic uncertainty that exists in the world today.

As far as the holiday-related demand goes, we think emerging market demand has still been pretty strong for PCs and cell phones, but weak in the US and Europe. We continue to believe that electronic sales will continue to benefit from share-of-wallet effects during the holiday season that people will choose to buy cell phones, tablets, flat-panel TVs, and all those great gizmos before they buy things like shoes and blue jeans, and that has happened the last 2 holiday seasons.

But I think our customers are generally anticipating a weak holiday demand, and we are watching it very closely.

I think as late as yesterday morning, Morris Chang came out and suggested that the outlook looks pretty uncertain, and they expect a weaker first quarter for 2012. They lowered their forecast for growth next year to, I think, around 4%. I think that was the number Morris talked about, 3% to 5%.

So, I think, number one, to answer your first question, we don't claim to have any real visibility or profound visibility that someone else may not have. We are a kind of make-to-order business, so we can see about, I don't know, maybe a month out.

But we pay very careful attention to what analysts and our customers are saying, and it is clearly we are in an uncertain world, and people are predicting some softness or weakness for the next 2 quarters. Typically, or historically, we've seen that this problem, when we have a weak holiday spend, it typically sorts itself out around March. So, we would expect some softness through March.

March, okay. And one question particular to the pads business, your pads business is growing pretty nicely sequentially, but lately it has flattened out, and maybe -- this quarter it was down sequentially and also down year over year. What is the dynamic that is impacting you there?

Well, I think it's two things, Avinash. It's both mix and it's competitive activity. And I think this morning it's important that we share some more data with you about our pad business. On a volume basis, our business was up sequentially 5%, and it was up about 7.5% versus the same quarter last year. Year on year, we were up 15% on a volume basis. So, we continue to win share, we continue to gain positions.

I talked in my prepared comments this morning, someone around here coined the 10-25-50 -- 10 customers looking at D200, 25 customers actively looking at qualifications, and some 50 opportunities. Our 25 customers overall and some 50 opportunities that people are looking at our pads for. So, our pad business remains vital, and continues to grow, and I think we should start sharing volume with people so you understand that we continue to grow.

We are faced with some competitive pressure. We expected it. We planned for it, and we are seeing it. We've managed to quickly gain, we think, 6% or 7% of the market. And we continue to grow and gain positions, and our competitors and competitor are doing what we'd expect them to do. They are defending their positions, and they are defending it with price, and we're doing what we've always done.

We continue to price for value. We think we bring a lot of value to our customers; we continue to price for value, but we are working hard to grow our business here, and earn what we think our fair share of this market is. So, I know people think we've kind of stagnated and we're not growing and are not winning positions, but on a volume basis we're up 15% year on year.

Right. So, basically we're up 5% sequentially, up 15% year over year in volume, but you are down 2.2% sequentially and down 10.2% year over year on overall revenues, right?

Yes, dollars of sales. So, when we think about mix --.

So, when we think about mix, we're up almost 4%.

It's a combination of -- up -- yes, for the full year up around 4%. When we talk about mix, it's predominantly a mix of pad sizes, 200 millimeter and 300 millimeter. And the pricing is quite different on a 200 millimeter pad versus a 300 millimeter pad. And that drives some of that revenue change due to mix.

Okay, so you would say your margins are better on 300 millimeter at this point, or not?

Yes. The answer is yes.

And final question on the tax rate, your tax rates were higher this year. How should we model next fiscal year?

We'd expect taxes to be in the range of 32% to 34% for the full year. There are a couple of things that drove tax rate higher for the year. Next year, we had looked for a renewal of the R&D tax credit, but that is set to expire in December. That's not factored -- the renewal of that is not factored in our projection or guidance for 2011. But think in terms of a 32% to 34% rate.

Perfect. Thank you so much.

Thank you.

Thank you, Avinash. Next question, please.

Dmitry Silversteyn, Longbow Research.

Good morning, gentlemen and Trish, how are you?

Good.

Good morning.

A couple of questions -- you mentioned in your prepared remarks, talking about businesses that you've had-- saw some pretty good demand and results in post-CMP cleaning applications. Can you provide us a little bit more detail on what exactly you are providing there? Is it part of the slurry package, or are you getting into a whole new area with respect to CMP process?

Sure, Dmitry. As a result of our acquisition of Epoch in Kaohsiung, southern Taiwan -- part of that business, they had a post-CMP clean business buried in that business. We got that as part of the purchase of Epoch, and we've continued to cultivate it and grow it. I think, maybe, the right way to answer this is to step all the way up.

Many of the CMP solutions we are developing and marketing, selling now are very sophisticated chemical formulations that require some very sophisticated, formulated CMP clean solutions. In general, we believe that there's probably nobody better to engineer a CMP cleaning solution then us for our CMP slurries because we know what is in them and we know what all the active ingredients are. We can formulate and design a clean solution to remove those components very quickly and effectively.

So, this business started at Epoch; it's been growing at Epoch in Taiwan with our customers there, and we are looking hard at extending and expanding that business to some of our other customers around the world. You know, it's kind of a -- I would describe it a little like our data storage business; it's kind of a very adjacent market for us. It's a tight fit with our technology and our scientists and our formulating scientists here in Aurora and around the world, both in Taiwan and Japan.

Okay, can you give us an idea, is this an established market that you are competing against somebody and taking share away, or is this an emerging market as we get into thinner [line widths]?

No, this is both. In some cases, we are competing with incumbent competitors. In other cases, we're developing CMP cleans adjacent to new generation CMP slurries.

I mean, as a great example, we've developed and entered the market with an aluminum CMP slurry. We believe we are the first, and we're the leaders for aluminum slurries for high-k metal gates. We are marketing and selling a CMP cleaning solution along with that aluminum CMP solution.

Okay. So right now, it's part of your -- in terms of reporting, it's part of your slurry business within a particular application, so you're not ready to break it down into a separate --?

No, and I would describe it as a relatively small, emerging business inside our Company. Dmitry, when it gets to a scale and size that we think it's important, we'll break it out and talk about it.

Got it, thank you, Bill. Second question, you mentioned on the call also the outlook for 2012, you said you were cautious and limited visibility, that's typically a comment you make every quarter. So, my question is -- is the visibility more limited than it is usually, or is it the usual limited visibility?

No, I think it is the usual limited ability, but perhaps greater uncertainty, Dmitry, is the way I would describe it.

Okay, got it. You mentioned working with -- on the joint development (inaudible) 22 nanometers; is that with tool manufacturers or with -- I mean, who are you joint developing it with?

We -- our predominant joint development activities are the ones that we consider our major ones, are with the leading-edge technology companies around the world.

Okay, so you actually -- the people that will be using your stuff?

That's correct. We've worked -- we do work with the tool manufactures closely, but we prefer, and in general we always work directly with the leading-edge technology companies.

Got it. On data storage, I was impressed to see the strength in that business throughout the year, but particularly, obviously, this quarter since it stands out from your other businesses. It's been a business that, for a couple of years before this, seems to have struggled and now it seems to have found its legs again. Is it change in kind of -- I'm trying to understand what the driver is behind that. Is it market reaccelerating, finding new applications, is it new products that you're introducing? What's behind this very strong growth that you saw in data storage?

I will lead off here. I want to just talk about our general strategy in terms of data storage and the rest of our business. A few years back, we decided to pick up all of our data storage resources that we had here in North America and move them to Singapore, and establish our site in the Woodlands in Singapore to support our data storage industry.

We staffed that business with Singaporeans and Malaysians and local scientists and engineers that serve that business and support our customers there. In general, we think that's a model that's very successful for our Company, in getting our technologists as close as we can to our customers, technologists. We did that in data storage. Bill can probably remember the date better than -- it's been a while.

2005, I think.

2005, and I think we are seeing the dividends pay back for that now, in this year and in last year. I'll let Bill give you a little more color on the business though.

Yes, the growth is really market share related. The hard disk drive industry has been relatively flat, kind of low single digits growth over the last several years. There is some growth with a corporate refresh cycle and with the growth of infrastructure to support clouds, but the hard disk drive market for PCs and servers has been relatively flat. So, the significant growth we've seen over the past 18 months or so has been mainly growing new business.

Do you think you still have some momentum left in there?

Well, the bulk of our business is focused on hard disk drives for PC and server applications, and we're developing products to serve the laptop market, which is glass, where you are polishing glass instead of nickel. And so, that's a growth opportunity to the extent we could develop new products and commercialize those successfully. There could be a bigger part of the market that we could access. But this has been a nice adjacency for the core CMP business for IC applications. And we've been real happy with the performance over the past 18 months.

Excellent. You mentioned low utilization rates, 60% to 70% at foundries, I am assuming that the integrated manufacturers aren't doing significantly better. Usually low utilization rates allow you guys to get into more trials and validations of both your slurries and your pads, specifically in the pads business because it takes longer time to validate.

Do you see the softening in the market over last quarter and in the next couple of quarters as giving you an opportunity to, perhaps, push some of those validations across the finish line and get that into a revenue-generating business?

Yes, that's usually what happens, Dmitry. I think -- you have it right. Historically, that's what's happened. It's provided engineering time and tool time at the fabs. The only caution I would throw out there is, if you remember in 2009, a lot of our customers sent their engineers home, so we didn't have access to engineers and tool times.

We don't think we're looking -- I'm not an economist and don't quote me on this, we don't think we're looking at another 2009 kind of recession. So, I think you're right. I think it would or may create some opportunities for us to drive some of these qualifications over the finish line.

Excellent, thank you very much. I will get back into queue.

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

Aaron Husock, Lanexa Global.

Great, thanks for taking my questions. I was hoping you could get into the gross margin dynamic for next year a little bit more? Just because it seems like it's been kind of one thing or another the last 3 quarters. I think in March it was yields and sample costs that hurt gross margins, and then in June it was a step up in fixed costs, and now in September it was fixed costs and FX, but now you're talking about all of next year being at, I would call, lower than gross margin levels for the Company. Has something changed with the pricing dynamic in the slurry business that means your normal gross margin is now lower?

Throughout the year, we've talked about foreign exchange, but we haven't quantified it. The impact of the weakening dollar versus the yen, in particular, has been profound, and we pointed out variances associated with that. So if you look year over year, we went from 49.9% to 48.1%. Of that difference, 1.5 percentage points is foreign exchange based. And that probably stays with us until, or if, the US dollar strengthens a bit. There are some things we can do to try to mitigate some of that, but this is income statement based and it's difficult to hedge that.

What's given rise to that is kind of an imbalance between our yen-denominated revenue and yen-denominated costs. Historically, we were in greater balance, a better match of yen-denominated revenue and cost. But as our business has grown in the Asia-Pacific region, and our Geino, Japan plant has grown and become a bigger part of supply in the Asia-Pacific region, we've grown more out of balance. And so that's given rise to this foreign exchange impact that's adverse to our gross margin. So, as we look at 2012, our expectation is that the yen/dollar exchange rate will stay about where it is.

We're not predicting a worsening or an improvement, but then in addition to that, we've talked about the new plant we built in Korea, so we've added fixed costs ahead of revenue, and we think that's the right thing to do. The early returns, even before that plant is operational, are encouraging. We mentioned that our Korea -- our business in Korea has grown 32% year over year, and one thing that will come out when we publish our 10-K is that Samsung will be named as a 10% customer, and they haven't been in the past.

So, I think there's a lot of momentum, and we're confident in that investment, but we are adding fixed costs ahead of revenue there and that's another factor. Overriding that then, overall, is just the uncertainty around the semiconductor industry and global economy, in particular, which causes us to provide the guidance that we have for full-year fiscal '12 of 46% to 48%.

Okay, and as you are thinking about operating expenses, you have guiding for OpEx to grow next year. If I just kind of flow through normal seasonality on your revenue line for the next couple of quarters, it gets you to total fiscal '12 revenue being down something like 5% to 10%, year over year. I know you don't have visibility into that yet, but if I just assume normal, that's where I come out, but you're talking about growing operating expenses.

You've always had a pretty tight handle on OpEx. I would've thought that some of the variable compensation would come down in a declining revenue environment. What levers do you have to pull if next -- if fiscal '12 ends up being a down revenue year? Or is this the right OpEx number for the Company?

Well, Aaron, let me try to answer your question. We are not budgeting at a down year for 2012. We expect to grow in 2012 versus 2011, and our costs reflect that, our OpEx reflects that. If we move into the year and we start to see our sales dropping off significantly, we have levers we can pull; we pulled them in the end of 2008 in preparing for 2009, and we can do that again.

I remind everybody, our revenue went down to, I think, $50 million or roughly in 1 quarter in 2009, and we were still cash flow positive. One of the things we did in that time was we continued to invest, and we didn't pull back from our customer-facing relationships. We will try to maintain the same strategy if we go into a lengthy downturn this time, but we do have levers we can pull to reduce our costs relatively quickly in response to significant change in the market.

Okay, thank you.

Thank you, Aaron. We will take our next question, please.

Dmitry Silversteyn, Longbow Research.

Wow, that was a quick getting back into the queue. (laughter) A couple of questions left on my end. First of all, on the ESF, obviously you've seen very good growth there as well, another stand-out in this quarter, and has been very strong for the year; a business that tends to be fairly lumpy.

So [as we] look forward to 2012, how should we think about this business? Has there been a slug of quarters that has come through and the business is going to pull back in 2012, or have you built some kind of momentum that gives you confidence that we'll continue to see growth there?

Well, I mean, we're delighted, of course. We had a great quarter in QED this quarter. The team there has done a terrific job. You know, we sell a lot of machines. That's the nature of this business. It is a capital equipment kind of business, and it's based on the number of machines they sell, and they sold a bunch in the fourth quarter.

They have a nice little backlog now. I don't think we should expect the kind of quarter we saw in Q4 every quarter. We caught a, let's call it a good lump this quarter, Dmitry. But we have some new products in the pipeline. We've got some exciting new technologies that are getting a lot of acceptance, and a lot of applause in the industry.

The men and women in that business continue to innovate and look for ways to get this technology to a broader market, both geographically and from a cost point of view. It's been interesting to watch us leverage our infrastructure in places like South Korea and Japan and some of these markets where Cabot Microelectronics has been for a long time, but QED has never been.

So, we've seen our share and sale of equipment and tools into that part of the world grow very rapidly, and we would hope to continue to see that happen. But I don't want to suggest that we should take Q4 and linearize it going forward. We'll see the lumps as that business grows.

One new dynamic in that business that we are looking forward to -- they recently announced -- we've recently announced a new business of QED optics where we are actually producing lenses, mirrors, prisms, for parts for customers. And we think that will be a nice complement to the equipment sales that's been the primary focus in the past, that this can grow to be an interesting part of the business going forward. Sort of like the data storage business, we think we've just had really strong execution within the QED over the last year, or 18 months. And so, hopefully they will continue to improve.

Okay, that's helpful. Thanks for the color. Just a follow-up question on that, there's a small, recurring consumable component to your QED sales, as I recall, [pragmatically] or maybe some other stuff. As your installed base grows, is the razor blade sales going to become a meaningful part of the business? Or are we still too thinly spread out for this to be impactful?

You know, I think it's an important part of the business, but I don't think it will be material, Dmitry. It's the magneto rheological fluid that you're speaking of, that this equipment uses to polish. And it's important and it's a nice little chunk of revenue, but in terms of materiality with the rest of the Company, I don't see that happening in the near future.

Okay. And then just a final question, any updates as far as patent litigation or anything else that's going on? You did mention that your professional fees were down, and that's been helpful with SG&A. Is there anything to watch out for in 2012, as far as anything coming to trial or any new issues that you're involved with?

No, what you're referring to is in the prior year we had pretty significant professional fees associated with a jury trial litigation of our IP against DA Nano Materials. And we finished that July of last year, and now we are still in the appeal phase. There is a hearing that will be November 9, and that would be the next step of the process, but we don't expect significant costs associated with this appeal process. We haven't seen that in the last several quarters.

Right, thank you very much.

Thank you, Dmitry. That is all the questions that we have this morning. Thank you for your time, and your interest in Cabot Microelectronics.

Thank you, ladies and gentlemen, for your participation in today's conference. That concludes your presentation. You may now disconnect. Good day to you.