CMC Materials, Inc. (CCMP) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to Cabot Microelectronics Corporation fourth-quarter and full fiscal year 2014 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) And as a reminder, this conference call may be recorded.

I would now like to turn the conference over to Ms. Trisha Tuntland, Manager of Investor Relations. Ma'am, you may begin.

Good morning. With me today are Bill Noglows, Chairman and CEO; and Bill Johnson, Executive Vice President and CFO.

This morning, we reported results for our fourth quarter and full fiscal year 2014, which ended September 30. A copy of our earnings release is available on 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 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-K for the fiscal year ended September 30, 2013. We assume no obligation to update any of this forward-looking information.

Also, our prepared remarks this morning reference non-GAAP financial measures. Our earnings release includes a reconciliation of these non-GAAP financial measures.

I will now turn the call over to Bill Noglows.

Thanks, Tricia. Good morning, everyone, and thanks for joining us. This morning, we announced financial results for our fourth quarter and full fiscal year 2014. During the quarter, we achieved record revenue of $116.3 million, including record revenue on our tungsten pads and aluminum product areas; a gross profit margin of 49.1% of revenue; and diluted earnings per share of $0.65.

For full fiscal 2014, we reported revenue of $424.7 million, reflecting record revenue on our pads, aluminum and advanced dielectrics products areas, but soft demand in our QED technologies and our data storage product line. We recorded a gross profit margin of 47.8% of revenue for the full fiscal year, which includes the adverse impact of the $2.1 million asset impairment charge we recorded during the second fiscal quarter, and earnings per share of $2.04.

Excluding this impairment, non-GAAP gross profit margin was 48.3%, and non-GAAP earnings per share was $2.10 for the year. Bill Johnson will provide more detail on our financial results later in the call.

Let me start this morning by recapping certain global semiconductor industry trends that we believe affected our CMP consumables business during fiscal 2014. First, as you may recall, we have talked in the past about seasonal trends within our business in tandem with evolving trends within the global semiconductor industry. During our fiscal year, we saw the continued trend of fewer and larger semiconductor companies accounting for a greater portion of capital spending in the industry. And this has continued to reduce the cyclicality of the industry when compared to historical trends.

At the same time, the increasing importance of consumer demand versus enterprise-based demand for electronic systems has introduced more seasonal shifts in demand around the back-to-school and holiday seasons. This now marks the third consecutive fiscal year in which our CMP consumables business has experienced soft industry demand conditions during the first half of the year, followed by stronger demand during the second half.

The second trend that impacted the industry during our fiscal year was a continued scaling of semiconductor devices to smaller and smaller geometries. As the industry continues to shrink dimensions, leading-edge technology node transitions have become significantly more challenging. To respond to these challenges, the industry has placed a heightened focus on new transistor and device architectures, which, in turn, is driving greater innovation in fab materials.

For example, we have seen increasing emphasis on development and production of advanced technologies like high-k metal gate, 3-D NAND and FinFET, requiring more highly engineered materials and highly formulated CMP solutions. As such, we are seeing that many of our new products are becoming more critical to overcoming our customers' technical and physical obstacles.

And we remain confident about the role our CMP solutions are likely to play in enabling these leading-edge technologies going forward. In response to this technology trend, we continue to focus on advanced technologies, driving greater innovation, and creating more compelling new value-adding CMP solutions for our customers, which we expect will assure our continued success.

Now we will provide some general comments on our current conditions we are seeing within the industry. Industry reports suggest that, overall, IC inventories are generally in line with forecasted IC sales, primarily driven by the continuation of positive trends in mobile connectivity, and anticipated solid demand for electronics during the holiday season.

While consumer reports indicate that the growth rate of high-end smartphones remain strong, demand for tablets appears to be slowing a bit, due to the transition in demand to larger-screen smartphones. Additionally, although the contraction of PC demand continues to slow, due to some growth in the enterprise sector, consumer demand for PCs continues to be muted. In response to these trends, IC manufacturers continue to actively manage IC inventory in the supply chain, with capacity of leading-edge technology nodes at or near full utilization, and around 90% utilization for legacy nodes.

Let me turn now to company-related matters, beginning with CMP slurries. We are pleased that our tungsten and aluminum product areas achieved record revenue in the quarter, with revenue growth of approximately 13% and 16%, respectively, compared to the same quarter last year. Additionally, we reported record annual revenue on aluminum and advanced dielectrics, with our aluminum revenue growing by 23% compared to fiscal 2013.

During the fiscal year, we won new business for tungsten, dielectrics, copper, and TSV applications, including both legacy and advanced node technologies. We believe our more focused approach to R&D and new product development, which we have discussed in the past, contributed to this year's new product introductions and business wins. In fiscal 2014, we spent approximately $59 million on Research and Development, or approximately 14% of our revenue. We believe this investment in technology is far in excess of any of our competitors, and underscores our strong commitment to innovation within the CMP consumables space.

Turning to our CMP polishing pads, we were delighted that we were able to reestablish revenue growth in 2014. Our pads product line achieved record quarterly and full fiscal year revenue. The fourth quarter was our third consecutive quarter of achieving year-over-year revenue growth. Notably, we grew quarterly revenue by 14% compared to the same quarter last year, and annual revenue by approximately 3%. We believe this growth is primarily due to the ramp of business wins we highlighted several quarters ago.

During the fiscal year, customers continue to actively sample our pad products for a range of new business opportunities. As a result of this collaboration, our pad products were adopted for a number of applications, including advanced node technologies. Our pipeline of new business evaluations underway with customers remains at an all-time high, and our global business teams continue to partner with existing and new customers. We remain confident that our attractive pad value proposition of longer pad life and lower defectivity will enable us to continue the momentum we established during fiscal [2004], as we head into fiscal 2015.

Fiscal 2014 was a prolific year for us in terms of customer recognition of our excellent quality systems and supply chain management capabilities. During the year, we were awarded seven Supplier Excellence awards for our outstanding support, contributions and performance. Most recently, during our fourth fiscal quarter, we received Samsung's Best in Value award, one of only two suppliers to receive the award, and the only material supplier. Earlier in the year, we received Intel's most prestigious award for suppliers, the Supplier Continuous Quality Improvement, or SCQI award, for the second consecutive year.

These awards recognize our product quality and reliability, and our service to our customers. And we are honored to be regarded as an elite supplier within our customers' broader supply chains. We look forward to continuing to build on our strong relationships with our technology-leading customers to consistently deliver innovative high-quality, high-performing, and reliable CMP products and solutions.

Now let me provide a few comments on our near-term outlook for the overall semiconductor industry. Sentiment regarding near-term demand seems somewhat mixed. Certain industry analysts and some of our strategic customers are forecasting solid demand early in our fiscal year, while others are suggesting softer demand conditions. Further, macroeconomic concerns also provide an overlay of uncertainty over the next year.

Based on seasonal demand patterns we have seen in the past three fiscal years, with softer demand in the first half followed by stronger demand in the second half, as we enter fiscal 2015, we expect some seasonal softening of demand in our first fiscal quarter, and we are experiencing some of that softening now. Including my remarks today, technology node progression and new chip architectures continue to introduce new CMP challenges, which we believe represent growth opportunities for our CMP consumables business.

We remain focused on supporting our customers by closely collaborating with technology leaders, and we intend to continue to develop game-changing technology, while leveraging our extensive global infrastructure and distinctive experience and expertise in Quality Systems and supply chain management. Furthermore we are confident in our ability to execute our strategies, and continue to provide value to our shareholders over a range of industry and macroeconomic environments.

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

Thanks, Bill. And good morning, everyone. Revenue for our fourth quarter of fiscal 2014 was a record $116.3 million, which reflects continued strengthening in demand that we saw beginning in the third fiscal quarter. We generated 3.9% revenue growth from our CMP consumables products for semiconductor applications over the same quarter last year.

Total revenue for the full fiscal year was $424.7 million. Full-year revenue results reflect stronger demand for our products in the second half of the fiscal year after soft industry conditions in the first half. However, lower revenue from QED technologies, which is primarily capital equipment=oriented, and our data storage product line, which is tied to the PC industry, primarily drove an overall 2% year-over-year revenue decrease. Foreign exchange rate changes also reduced revenue by $2.4 million, primarily due to the weaker Japanese yen versus the US dollar.

Drilling down into revenue by product area, tungsten slurries contributed 38.7% of total quarterly revenue, and we achieved record revenue for the second consecutive quarter. Revenue was up 13.3% from the same quarter a year ago, reflecting strong demand from the memory and foundry segments. For the full-year, tungsten slurry revenue increased by 4%.

Dielectrics slurries provided 25.2% of our revenue this quarter, with sales down 9.7% from the same quarter a year ago. For the full year, dielectrics slurry revenue decreased by 4.1%. The revenue decrease reflects the loss of some low-margin legacy ILD business that we mentioned during our call last quarter. However, within dielectrics, revenue from our advanced dielectrics product area achieved year-over-year growth for the third consecutive quarter and record revenue for the full-year.

Sales of slurries for polishing metals other than tungsten, including copper, aluminum, and barrier, represented 18.8% of our total revenue, and increased 2.8% from the same quarter last year. For the full-year, revenue increased by 0.3%. Within this area, we achieved record revenue from our aluminum slurry products for both the quarter and full fiscal year, with double-digit revenue growth on both bases.

Sales of polishing pads represented 8.5% of our total revenue for the quarter, and increased 14% compared to the same quarter last year. We've now grown our pad revenue year-over-year for three consecutive quarters. Revenue was up by 2.5% for the full-year. We achieved record revenue levels for our pads products for both the quarter and full-year.

Data storage products represented 3.6% of our quarterly revenue. Our data storage revenue was down 15.6% from the same quarter last year, and down 13.7% for the full-year on continued contraction of PC demand and some business losses we mentioned last quarter. Finally, revenue from our engineered surface finishes area, which includes QED, generated 5.2% of our total quarterly sales. Our ESF revenue was down 34.1% from the same quarter last year, and down 32.7% for the full-year. Volatility in our QED revenue is common, given that it's primarily a capital equipment-oriented business.

Our gross profit this quarter represented 49.1% of revenue compared to 50.9% in the same quarter last year. Our gross profit percentage decreased, primarily due to higher variable manufacturing costs, including higher raw material costs, partially offset by a higher-valued product mix. For the full fiscal year, gross profit represented 47.8% of revenue, which includes the adverse effect of the $2.1 million asset impairment charge related to certain manufacturing assets that we recorded during our second fiscal quarter.

Excluding the impairment charge, non-GAAP gross profit was 48.3% of revenue. Our full fiscal year 2014 guidance range was 48% to 50% of revenue. Gross profit margin decreased from 49% of revenue in fiscal 2013, primarily due to higher variable manufacturing costs, including higher raw material costs and the asset impairment, partially offset by benefits associated with foreign exchange rate changes. For full fiscal year 2015, we expect our gross profit margin to be between 48% and 50% of revenue.

Now I'll turn to operating expenses, which include research development and technical, selling and marketing, and general and administrative cost. Operating expenses this quarter of $34.1 million were 3.8% lower than in the fourth quarter of fiscal 2013. The decrease was primarily due to lower staffing-related expenses, including incentive compensation costs, partially offset by higher professional fees.

For the full year, total operating expenses were $131.3 million, which is $4.4 million lower than last year. The decrease was driven by lower staffing-related costs, including incentive compensation costs partially offset by higher professional fees. Our guidance range for full fiscal year 2014 was $127 million to $131 million.

Looking forward, we expect our operating expenses for full fiscal year 2015 to be within the range of $132 million to $137 million. The expected increase is primarily due to anticipated higher staffing-related costs. And the midpoint of this range represents a 2.4% increase versus fiscal 2014.

Diluted earnings per share were $0.65 this quarter, up from $0.64 in the same quarter last year. Earnings per share increased, primarily due to a lower effective tax rate and lower operating expenses, partially offset by a lower gross profit margin. Diluted earnings per share for the full-year were $2.04, or $2.10 on a non-GAAP basis excluding the asset impairment, compared to $2.19 last year.

You should note that, as we previously disclosed, prior-year earnings per share were revised to reflect some nonmaterial adjustments compared to our original disclosure. We discussed this in our Form 10-Q for the June quarter, and you will see a more complete discussion in our fiscal year 2014 Form 10-K that we expect to file mid-November. We expect our effective tax rate for full fiscal year 2015 to be between 18% and 20%, which is lower than 26% in fiscal 2014.

Turning now to cash and balance sheet-related items, capital investments for the quarter were $2.3 million, bringing our full-year capital spending to $12.6 million, below our guidance of approximately $15 million for the year. For full fiscal year 2015, we expect capital spending to be within the range of $10 million to $15 million.

Depreciation and amortization expense for the quarter was $5 million. In addition, we purchased $6.4 million of our stock during the quarter and $53 million for the full-year. As of the end of the quarter, there was approximately $125 million of authorization remaining in our share repurchase program. We ended the quarter with a cash balance of $284.2 million, which is $18.6 million higher than last quarter and $58.1 million higher than last year, and we have $172.8 million of debt outstanding.

I'll conclude my remarks with a few comments on recent sales and order patterns. Historically, our fourth fiscal quarter is seasonally our strongest quarter of the year, frequently followed by some seasonal softening in demand in the first quarter of a new fiscal year. And we are seeing some softness now.

Examining revenue patterns within the three months of our fourth fiscal quarter, we saw demand for our CMP consumables products increase by about 5% from the average of the three months in our June quarter. 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 approximately 4% lower than the average rate over the September quarter. However, I would caution, as I always do, that several weeks of CMP-related orders out of a quarter represent only a limited window on full-quarter results.

Now I'll turn the call back to the operator as we prepare to take your questions.

(Operator Instructions) Avinash Kant, D.A. Davidson.

So, one or two questions. Of course, the first one is that Bill provided the guidance on the operating expenses for fiscal year 2015. Could you talk a little bit about what kind of revenue assumptions does that target have?

Our longer-term goal has been to have operating expenses approximately 30% of revenue. And we've been around that over -- throughout history. You know we don't guide specifically to revenue, but operating expense goal over time is to get to around 30% of revenue or lower.

Avinash, I would remind you that as we start a fiscal year, we -- like most companies, we start with a budget. And if you'd look back at last year, or that year we just completed, 2014, we started the year with OpEx guidance of [131 to 135]. And I think at the second quarter, we reduced our guidance to [127 to 131], based on what we were seeing in the market.

You know we started last year expecting more growth, and that growth didn't materialize. And so we manage our OpEx sort of dynamically, and we can turn it on and off. And we would expect to manage the Company no differently in 2015 going forward. But as we start the year, we start with expectations of growth and success with many of our initiatives. And as the year goes on, we modify our OpEx accordingly.

Also, as we describe the variance quarter-to-quarter and year-over-year, we mentioned operating expenses were lower, partially due to lower staffing-related costs, including incentive compensation costs. So, our incentive compensation costs for FY14 are lower than target. And like Bill talks about, when we start out with a budget for the next year, we tend to budget at a target level for that. It's largely staffing-related cost and incentive comp that were causing that 2.4% increase at the midpoint of the guidance range.

So that's what I was trying to figure out -- is it that all of the operating expense increase is commensurate with the revenue growth expectations? Or there is some additional component of the staffing expenses that you expect to be higher in fiscal year 2015?

Right. Again, we don't guide to revenue, and we have a longer-term operating expense target. But specifically, I'd point to the 2.4% increase in operating expense. You can tie that pretty directly to the difference in incentive comp between FY14 actual and sort of a target level assumed in the budget in FY15.

And talking a little bit about the pads business, of course, it looks like you grew significantly in the pads business this quarter. And if I look at the sequential growth, I think it comes out to roughly 13% or so, 13% to 14% or somewhere around that. And I look at one of your key customers, TSMC, which also grew kind of at a similar amount. So what I'm trying to understand is that, is all of the growth in pads coming from the existing customers? Or you actually did sell into some new customers in the quarter?

No, it's a blend, Avinash. We've sold to a number of new customers outside of the big customer in Taiwan. We're -- like I said in my prepared comments, we are excited about the traction we're getting, both at the leading edge and with some legacy customers that have -- you know, they've seen the value on our pay.

I would -- you know, you know this -- we've been slugging it out now for a couple of years, and we are quite excited to actually see three consecutive quarters of growth in our pads business. And it appears we're getting a little bit of traction as we go forward. But to specifically answer your question, you know, our guys in the field and the people that manage this business look very closely to sales outside of what I would describe the big guys. And those are important customers to us, as we implement and get our pads in the market and sort of confirm the value.

So should we take this quarter or, of course, the last two or three quarters you've been seeing some growth, as some sign that you are starting to see traction of some of the new customers, and that may still lead to some sort of growth in the pads business going forward, despite the seasonality?

Yes, we hope so, Avinash. I think we've talked in past quarters about qualifications and work we've been doing with customers. And they take a while. And we think we've seen in the last three quarters is, those qualifications are materializing in high-volume manufacturing sales for us.

And again, we've been -- that process has been a lot longer than we expected it to be when we added this business, but we feel confident that our value proposition is significant enough where people are actually making -- you know, they are doing the work to make the switch. And it's -- again, it gives us optimism going forward that we would expect and can hope for continued growth as we go forward.

And final question, Bill, of course, you know, you did talk about actually this month of October being down 4% from the average last quarter. Is it any different than normal seasonality that you expect?

No, that's about normal seasonality. If you look at the last three years, and just look at the CMP consumables business, I think we've -- the last three years it's been either a couple of percent or 4%, and at the worst, about 9%. So that that 4% is relatively normal seasonality within kind of normal noise.

What I would point out is that last year at this time, we mentioned that QED was entering the fiscal year 2014 with very little backlog of orders. And as we enter 2015, fiscal 2015, QED has a pretty healthy backlog going into the year. So that's the difference.

Thank you so much.

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

Jason Ursaner, CJS Securities.

Congrats on a solid finish to the year. Just first on revenue, what was the other metals as a percent of sales? I thought, Bill, you mentioned 16% growth year-to-year in the quarter. That was just for aluminum, not the whole group?

That's right. Non-tungsten metals was 18.8% of total revenue for the quarter. And year-over-year, it was up 2.8%. But within aluminum -- within that category, aluminum had a very strong growth.

Okay. And what are you seeing in copper? I guess, why wouldn't copper be seeing stronger growth with some of the new architecture features, like through silicon vias and that sort of stuff?

In copper, what we've talked about recently is kind of a transition from legacy products that are pretty sold almost point of use or just diluted a bit by our customers to new, more concentrated products. And so as we transition customers from these legacy products to the newer, highly-concentrated products, we get an increase in gross margin percentage, but actual revenue is going down.

So it's higher profitability; but with a high concentrate, it's not growing revenues. So that's what's the offset -- the overall non-tungsten metals is growing modestly year-over-year. We are seeing pretty strong growth in aluminum. But then copper is going down a bit.

Okay. And on the gross margin for dielectrics, you had talked last quarter about the strategy to focus on the advanced piece where you get better margin and kind of let some of the older legacy business, that was a lower margin, slide. Just maybe an update on what you're seeing there? And whether that strategy is kind of coming to fruition?

I do remember last -- I think last quarter I spoke about a piece of business that we had let sort of go away, it was low margin legacy 200 millimeter dielectrics business. That is in -- in effect, we expect that to continue to go through this year. And we'll see probably about another $10 million of revenue decrease, but with a commensurate higher gross margin for that product line family.

I think it will be helpful to mention or note that we've introduced a new product back in the summer in July that's targeted both advanced dielectrics and legacy dielectrics. The product is based on a highly-engineered particle system that brings both higher performance and significantly lower cost to our customers, for both legacy and advanced dielectrics applications. You know, that is our response to maintain our success on our gross margins and our position in these markets, in that we think, with this product, we can bring our customers significant value, and reduce their costs, and compete against some of these functional materials we've seen at the lagging edge, if you will.

But so far, we've been sampling these products since the summer. The reaction from our customers is very positive. Some of our customers are being very aggressive with this product. And we have very high expectations of that product in both advanced dielectrics and legacy dielectrics. So, that's kind of my update. I'm happy to talk more about (multiple speakers) dielectrics.

I appreciate those details. And for the QED business, looking at the gross margin, I think in the past, you've talked about that business being above corporate average. Have you guys quantified sort of how much above that would be? Just trying to figure out -- yes, but the gross margin obviously is pretty strong in the quarter, and that's including the decline in QED. So, just trying to figure out how much of an additional headwind is sort of embedded in that number, even though it's pretty good on a reported basis.

Right. So, the last two fiscal years, 2012 and 2013, we had successive years of revenue -- of record revenue in QED. And at those kind of revenue levels, yes, the gross margin is somewhat higher than the Company average. Then not surprisingly, when you sell fewer machines, revenue comes down and the gross margin falls pretty significantly.

And, in fact, in this last quarter, we had one situation where we had developed a new product within QED, and it was intended for R&D use. And then we actually sold that machine to a customer. It was around $1 million of revenue. But because that was a developmental machine as we sold it, it carried, in cost of goods sold, all the developmental costs.

So within our results for the fourth quarter, there's about $1 million of revenue from QED that was zero margin. And so that kind of pulled down the overall Company margin for the quarter. But when QED is running well, yes, the gross margin is moderately above sort of average for the Company.

That R&D machine was this year Q4 or last year?

This year's Q4.

Okay. And where is backlog for that business heading into next year?

It's more than half of the revenue from last year. They had $12 million of revenue last year, so it's something greater than $6 million heading into 2015.

It's much higher than what we had heading into 2014.

Yes, we had less than $1 million heading into 2014.

Okay. And given the seasonal pattern for the core business that you talked about with -- you know, seeing the year soften the last couple of years, what was the manufacturing activity like for you guys in Q4? Just because I know you talked a few quarters ago about the variance you get on the next quarter relative to what you build internally.

I -- Yes, I don't know specifically, but it seems like activity has been pretty strong, given the strong demand level in the fourth fiscal quarter.

Okay. And just last question from me on the polishing pads, sort of a follow-up on Avinash's question. How should we think about the growth from here? It's obviously been a nice growth on a percent basis. Relative to the overall company, though, still relatively small as a category for the last couple of years. So, do you see it as just solid, above-average growth off of the current base? Or, at some point, are we still looking for more of a step function change to being a larger business?

Well, I think we -- you've heard me say this before. We were maybe a little more optimistic about the difficulty of penetrating the pad business when we entered it. I think now we are in a period where it's kind of steady as she goes, kind of growth.

I think as our team looks forward, they see consistent growth expectations on the order that we've seen probably the last three quarters. But I'd caution us all. It's very difficult to us -- for us to predict when a customer will make a switch and how long they will take to qualify a pad product. So it's hard for us to actually put out forecasts that are meaningful, because we don't control the quality; the customers do.

But I think -- we remain optimistic about the value proposition we are bringing to our pad customers, and some of the R&D we're doing on our next-generation technologies. Again, we've said consistently we consider this the highest potential incremental growth opportunity for our Company, and we continue to believe that.

Okay, great. I appreciate all the details. I'll jump back in the queue. Thanks, guys.

Thanks, Jason. We'll take our next question, please.

Edwin Mok, Needham & Company.

Thanks for taking my question. So, first is on tungsten. It looks like you guys have done quite well there and continue to grow for the year, for the quarter. So I was wondering, is that -- how much of that is driven by how this -- some of these memory device such as DRAM and NAND shrinking down to the leading edge might require more tungsten? Or how much -- or just your market position? Or can you kind of give some color around that? Is it more related to memory? Is it more related to foundry? And is it more related to your market position in tungsten?

No, we think the growth is mostly related to very strong demand from both the memory and foundry segments. I'm not sure I can split it out precisely. You know, so I think as you know, Edwin, we have a strong position in tungsten. We have a great family of products.

So, we secured some new business and a legacy note application during the first quarter of the year. And we are seeing the sales from that. And we just continue to enjoy a really robust product family here that meets the customers' expectations for both performance and price.

One of the things that we are watching carefully is the success of the iPhone 6. That clearly exceeded Apple's expectations when they launched it, and they continue to be pretty bullish about the 6 going into the holiday season. That platform has a lot of memory in it and we serve the customers that manufacture that memory. So that's an exciting sort of opportunity for us.

And we pay attention to that, because that swings -- as you know, that swings capacity across the supply chains of our customers. But I think the bulk of the growth comes from strong demand from both the memory and the foundry segment.

Can you split it up?

Sorry.

Okay, great. That's helpful, actually. And then on the dielectrics business, on the highway business that you guys walked away from in your inventory (technical difficulty) $10 million of revenue decrease coming from that, I guess that piece of business. Are you kind of halfway through there? I'm just trying to understand how much is that relative to the business?

And it seems like your dielectric revenue has seemed kind of stable actually, in spite of walking away. Is it just because of growth in advanced dielectrics and maybe some penetration that offset that?

No, I think it's growth in the advanced dielectrics segment. It's been a bit slower for us to see that displacement. We expect that $10 million reduction to come over the first two quarters of this fiscal year, roughly. And you know, as I said earlier, we are in the process of introducing new products to sort of fill that gap.

So, our strategy has been in the legacy dielectrics business to increase productivity or profitability, and not necessarily go after sort of market share. And I think we've been successful with that strategy. And with the introduction of this new product, I think we are feeling pretty good about our position in both legacy and advanced dielectrics technologies.

Okay, good. And then on the pad, regarding the pad business, if I go back and look at the last two years, I remember that customer extending the life of using your pad has actually been unfortunately a negative effect on your business. Right? Have you kind of seen that subsided already? Was that a contributing factor that helped you? And what about pricing? Have you seen any kind of pricing pressure, especially from your competitor? Has that also subsided to help you in the pad? Or is it all just coming from these new wins?

Well, let's talk about life first. Our customers -- and you know there's -- customers are not created equal here. So we have some very aggressive, let's call them technology leaders, that push technology as far as they can push it. In the case of our pads, we've seen some of our customers push the pad life beyond what we had sort of thought they could.

And the downside of that is, it's dampened our revenue growth a little bit. The upside is, it's really entrenched us as an incumbent supplier. Because that value proposition is solid and strong, and that word gets around in the industry. So it's kind of good marketing and sales for us as well. We're not happy about the slow growth of revenue, but we like the fact that people are really sort of pushing the value proposition of our pad. We think it builds loyalty in the supply chain.

You know, on the pricing side, over the last couple of years, you've heard us discuss pricing. And we expected our competitors to be aggressive with price to try to hold us out of the market, and sort of compromise our value proposition with price. That activity has been, I would say, relatively high over the last couple of years.

Can I stand here today and say it's subsiding a little bit? I'm not sure yet. But as I said -- as you see in our numbers and what we said this morning, we've seen three consecutive quarters of growth. And we're not reducing our prices to win that business. We are pricing that market like we would. So maybe we're at the end of that curve. I'm not calling it, but we're happy to see a little bit of growth, Edwin.

Great. And then the last question on just the Engineering Service group in general, or the Q3 business. Right? Actually on a sequential basis actually increased on the September quarter, right? And but obviously, for a full year is still lower from last year, right? Is it -- are we in the new kind of stabilized or even improved level with improved bookings, should we kind of expect that business to at least have some growth in 2015, maybe get back to the $24 million number that you did in 2013?

You're right. The sequential growth was pretty significant there. I think our ESF business was up sequentially about 55% on revenue. But it is -- we say this every time. It is a capital equipment-oriented business. So, really, revenue follows a number of machines primarily that they are able to sell. And so the fourth quarter was a pretty strong quarter.

Remember, the fourth quarter of last year was really large -- I think around $9 million of revenue. And the ESF business compared to around $6 million or so this quarter. And I mentioned the strong backlog going into fiscal 2015. But it will continue to be a lumpy business. Even with that backlog, the delivery will be over the year. And they'll work to get more orders. But no, I don't think that there's stability there; it's just not the nature of that business

Okay, great. That's all I have. Thank you.

Thank you, Edwin.

Chris Kapsch, Topeka Capital Markets.

Good morning, Chris.

Good morning. I have a few questions. Bill Noglows, your commentary about -- appreciate the commentary about the focused R&D approach, and that you feel like that gives you competitive advantage, particularly from a standpoint of the absolute R&D spend.

I'm just wondering, as that relates to some of your customers or prospective customers at the advanced applications, like FinFET and 3-D NAND, are you seeing like that you're getting, because of your ability to throw more resources at those challenges, are you getting sort of a disproportionate amount of the collaborations? Any sense for your likelihood of sort of disproportionate success at those sorts of applications?

Well, I think we might -- that's a great question actually, Chris. I think we get a disproportionate amount of looks, you know what I mean? When people are considering new technologies, they typically come to us.

You know, one of the clear advantages we feel we have is our scale. We still think and believe that we are approximately 3 times larger than our next largest CMB competitor. And remember, we compete against small divisions of very large companies, so when we look at the revenue of those divisions.

And that scale allows us to do joint development with all of the technology leaders. Some of our competitors may choose to work with one or two customers. We work with all of them -- at different levels of depth, of course, but we have the scale, and we have the people and the capacity to engage in a number of different joint development activities with a number of different customers.

So I think your question is a good one. I never really thought of it that way. But I do think we get a disproportionate amount of looks at new opportunities.

You know, whether we are successful with them is just solely based on how efficiently we execute and how good our technology is. And I think that by refocusing or focusing our technical activity on just the technology leaders, I think that's caused us and enabled us to just bring more horsepower and brainpower, quite frankly, to the leading-edge applications. And I think we are seeing some lights at the end of the tunnel here on some of these new products that we are bringing into the market.

So, it's a great question. You know, it will play out over the next -- and certainly, in this year, you know, in this new product I talked about we are introducing now, and some other new products that are coming out of our pipeline. You know, it's going to play out over the 2015 fiscal year and into 2016. So we'll keep a close eye on it and report out as we go. But we are excited about our progress so far.

Okay. And then following up on that -- thanks for that -- but on the new dielectric product you introduced that addresses legacy and advanced dielectrics, just a couple things. One, what is -- how are you positioning -- what's the proposition to the customer? Is it a cost of ownership proposition? Or is it simply pricing and -- assuming it's cost of ownership, what's the advantage versus, say, legacy products?

And then what's the margin profile? I'm just wondering if that -- if you anticipate that will cannibalize some of your products currently being used in advanced dielectric applications.

Let me answer the first question -- the last question first. Typically in our R&D and our product development, when we introduce a new product, it almost exclusively has higher gross margins than the product we would be cannibalizing of our own. It's just part of the way we think about new product introductions and new product strategies.

In the case of this particular product, it uses a proprietary highly-engineered particle system that enables us -- and our formulators and scientists have been really innovative here -- it enables us to use far less particle in the formulation than some of the competitors materials. And I think, as you know, the highest cost component of a CMP slurry are the micro-aggregate particles that are in that slurry.

So, our ability to bring this -- and it's dilutable at the same time. So we can bring this CMP solution to our customers at significantly lower cost. And what's really exciting about it is, the performance is significantly better from a planarity and a removal rate aspect. So, we really feel good about this one, and think it's a strong offering to both continue to grow in advanced dielectrics, and cement a really strong position in some of the legacy dielectrics applications.

Sounds good. Could you just -- on the commentary about the quarter and the order pattern, you talked about the average, I guess, thus far into October versus the September quarter. I'm just wondering how those monthly orders look sequentially during the September quarter? Were they lumpy? Were they kind of consistent each month?

I think they were relatively consistent. We saw -- when we talked in July about the June quarter, we were expecting strength in this fiscal fourth quarter. And at the time we had the call late July, we said we hadn't seen that upturn yet. And so then, I think it was early August where we really saw the orders increase. And so, August and September, I guess, were probably stronger than July, but not real noticeably.

Got you. And then just a follow-up on parsing out the pad, the acceleration in pad sales, is this what you're seeing mostly D100? Or is D200 contributing here to the sequential increase in pad revenues?

Yes, most of the growth is still D100, although D200 is contributing.

Got you. And then, finally, I guess you'll be filing your 10-K soon. I'm just -- I'm assuming, as in last year's 10-K, that both TSMC and Samsung will be called out as 10% customers. Do you anticipate a third 10% customer?

No. But I think it's -- no. What's kind of interesting to us is we're going to call out that TSMC will be 22% and Samsung will be 14%, which is a little bit higher than last year. I think it just reflects consolidation. (multiple speakers)

And the third largest customer didn't quite make the threshold?

Chris, there's not a 10% -- another 10% customer we had disclosed. But for both TSMC and Samsung, both of those have increased over time. In 2012, TSMC was 18%, then 21% the next year, and now 22%. And likewise, Samsung has been 13% for a couple of years, and now up to 14%. So, we're happy with the strong position with both of those customers.

Okay, thanks, guys.

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

Ladies and gentlemen, thanks for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.