CMC Materials, Inc. (CCMP) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cabot Microelectronics first quarter fiscal year 2015 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 give at that time. (Operator instructions.) As a reminder, this conference is being recorded.

I would now like to hand the conference over to Trisha Tuntland, Director of Investor Relations. Please proceed.

Good morning. With me today are Bill Noglows, Chairman of our Board of Directors; David Li, President and CEO; and Bill Johnson, Executive Vice President and CFO.

This morning we reported results for our first quarter of fiscal year 2015, which ended December 31st. A copy of our earnings release is available in the Investor Relations section of our website, Cabotcmp.com, or by calling our Investor Relations office at 630-499-2600. A webcast of today's conference call and the script of this morning's formal comments will also be available on our website.

Please remember that our discussions today may 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 30th, 2014. 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.

On December 16th, we announced that our Board of Directors had elected David Li as President, CEO, and member of the Board effective January 1st, and that I am continuing to serve as Chairman in an executive capacity. I'm delighted with this exciting transition for our company and to take this opportunity at our first quarter earnings conference call of fiscal 2015 to introduce David.

Over the last several years, we have shared in detail with you the tremendous value proposition we believe that we bring to our strategic customers, delivered through close collaboration as we develop leading edge solutions for their increasingly demanding requirements. During this time, we have expanded our infrastructure to better serve our growing customer base in Asia.

Today over half of our fixed assets and our global staff are located in the region where we generate more than 80% of our revenue and approximately 75% of our production activity. Through this approach, our company has generated very strong business and financial results.

David's appointment as CEO reaffirms our commitment to this strategy. Let me provide a little background on David and the experience he brings to this role.

David has been a key contributor to the company's success in a wide range of roles over 15 years with our company. For the last seven years he has served as Vice President of Asia-Pacific.

In this role, David has developed deep partnerships with our key customers and has proven to be an outstanding leader. I am confident that as our CEO David's track record, energy, and vision for the continued growth and development of our company, coupled with our history of strong operational and financial management and results, will mean ongoing success for our company and greater value for our shareholders.

It has been an honor to lead Cabot Microelectronics as its CEO for the last eleven years, and I am confident that our long term executive succession planning will continue to provide for a seamless transition of leadership. Continuing as Chairman, I look forward to working with David and the rest of the Board to advance our company strategy.

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

Thank you, Bill, and good morning, everyone. I am honored and excited by the opportunity to serve as CEO of Cabot Microelectronics.

First, I would like to thank and recognize Bill for his leadership of our company over the past 11 years. It is Bill's vision and leadership that has made us the very successful company that we are today. Further, I'm delighted that Bill is continuing to serve as Chairman of our Board of Directors and look forward to continue working with him in this capacity.

Now I'd like to provide a high level summary of our quarterly financial results, offer some commentary on our views of the current condition of the semiconductor industry, and provide an overview of our business activities.

This morning we announced very strong financial results for our first quarter of fiscal 2015, which continues the strong positive momentum we experienced during our fourth fiscal quarter of 2014. During the quarter we achieved revenue of $111.9 million dollars, 11% higher than the same quarter last year.

We recorded a gross profit margin of 50.9% of revenue, representing a 340 basis point improvement year-over-year, and record earnings per share of $0.80, an increase of 78% compared to the prior year.

We believe our results are evidence of the continued successful execution of our business strategies, including closely collaborating with our strategic customers, technology leadership, and operations and quality excellence. We are encouraged by this strong start to our fiscal year, about which Bill Johnson will provide more detail.

Let me now share a few thoughts on our views of the current state of the semiconductor industry. A few weeks ago we participated in SEMI's Industry Strategy Symposium, or ISS conference, in California. This is an annual event which focuses on trends in the industry from economic, market, technology, and manufacturing perspectives.

The conference addressed the demands for the continued development and manufacture of advanced semiconductor devices while stressing the importance of supply chain excellence to deliver increased value to all stakeholders.

Equally important was the shared view of sustained future growth for the industry, driven by the continued demand for mobile devices and systems, stabilization of traditional PC markets, and the future potential of the Internet of Things, all of which are expected to drive greater innovation and demand for semiconductor devices.

We share this view of the future of the industry. And based on our own analysis, our customers' expectations, and other external forecasts, we remain highly energized and optimistic about the long term future growth prospects for our company.

As we have discussed in the past, we have seen our customers increasingly emphasize development and production of advanced technologies like high-k metal gate, 3D NAND, and FinFET in response to the industry's continued scaling of semiconductor devices to smaller geometries.

These advancements are driving the need for new and critically important CMP steps, which require more rigorously formulated and higher quality CMP solutions. As demonstrated by our early leadership in aluminum slurries for high-k metal gate, we expect that these advancements will continue to play into our strengths as a CMP technology leader while we partner with our strategic customers to help enable new transistor and device architectures.

We believe our focused approach to R&D and new product development and our global footprint will continue to enable us to capitalize on new product introductions and win more business.

Moving on to near term semiconductor industry conditions, various industry reports suggest that overall IC inventories are generally on the lean side of normal levels, primarily driven by solid demand for mobile devices during the holiday season and a firm forecast for electronic system shipments going forward.

In response to this, IC manufacturers continue to actively manage inventory in the supply chain, with capacity utilization at leading edge technology nodes greater than 95% and overall industry utilization at approximately 90%.

Recent reports by a number of our customers call for typical seasonal softening during the March quarter. Conversely, the leading foundry is calling for near term demand that appears to be stronger than normal seasonal demand.

Recall that typically we experience seasonal softening of demand in

our second fiscal quarter, which is historically our seasonally weakest quarter of the year. Later in the call Bill Johnson will provide some commentary on recent order patterns.

Now let me turn to our core IC CMP consumables business, which generated 10% revenue growth compared to the same quarter last year. During the quarter we experienced solid growth in demand for our CMP solutions for both memory and logic applications year-over-year. Our tungsten product area achieved record quarterly revenue for the third consecutive quarter, and we attained double digit year-over-year revenue growth in this area as well as for our aluminum, pads, and advanced dielectric slurries.

We believe this growth is a result of our continued focus on offering CMP solutions for advanced and legacy applications that are designed to deliver higher performance and significantly lower costs to our customers.

In particular, we are currently introducing a new family of dielectrics products which we commercially launched in July of last year and first mentioned during our third quarter call of fiscal 2014. We believe these solutions will provide higher performance and greater value to our customers compared both to competitors' products and some of our own existing products, while also improving our profitability.

We have high expectations for the adoption of these new solutions. And we are encouraged by our customers' level of sampling and a number of their positive initial reactions to product performance.

In summary, our overall pipeline of new business opportunities in our CMP consumables business remains rich, with product evaluations underway with customers across a wide range of slurry and pad applications and technology nodes. Further, our global teams continue to partner closely with our technology leading customers to satisfy their ever-increasing performance requirements.

And with that, I will turn the call over to Bill Johnson for more detail on our financial results.

Thanks, David, and good morning, everyone.

Revenue for the first quarter of fiscal 2015 was $111.9 million, 11.4% higher than the same quarter last year. We generated 10.2% revenue growth from our CMP consumables products for semiconductor applications compared to the prior year.

I would add that foreign exchange rate changes, primarily the weaker Japanese yen versus the US dollar, reduced revenue by $1.2 million year-over-year.

Drilling down into revenue by product area, tungsten slurries contributed 40.3% of total quarterly revenue, and we achieved record revenue for the third consecutive quarter. Revenue was up 20.8% from the same quarter a year ago, reflecting strong demand from the foundry, memory, and logic segments.

Dielectric slurries provided 25.2% of our revenue this quarter, with overall sales down 5.9% from the same quarter a year ago. The revenue decrease reflects the loss of some low margin legacy interlayer dielectrics business that we mentioned during our call last quarter.

However, within dielectrics, revenue from our advanced dielectrics product area grew 18.1% compared to the same quarter last year. This represents the fourth consecutive quarter of year-over-year revenue growth in advanced dielectrics.

Sales of slurries for polishing metals other than tungsten, including copper, aluminum, and barrier, represented 17.8% of our total revenue, and increased 11.8% from the same quarter last year. Within this area, revenue from our aluminum slurry products grew 35.6% compared to the prior year.

Sales of polishing pads represented 7.8% of our total revenue for the quarter and increased 18.2% compared to the same quarter last year. We have now grown our pad revenue year-over-year for four consecutive quarters.

Data storage products represented 3.9% of our quarterly revenue. Our data storage revenue was down 12.4% from the same quarter last year on soft PC demand and some business loss that we first mentioned during our third quarter call of fiscal 2014.

Finally, revenue from our engineered surface finishes, or ESF area, which includes QED, generated 5% of our total quarterly sales. Our ESF revenue was up 86% from the same quarter last year. Volatility in our QED revenue is common, since it's primarily a capital equipment oriented business.

Our gross profit this quarter represented 50.9% of revenue. This is up 340 basis points from 47.5% in the same quarter a year ago.

Compared to the year ago, gross profit percentage increased primarily due to product mix, higher sales volume, and benefits associated with foreign exchange rate changes, partially offset by effects of lower manufacturing yields, higher raw material costs, and higher fixed manufacturing costs.

Our full fiscal year 2015 guidance range of 48% to 50% of revenue remains unchanged.

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 $34.4 million were $2.4 million higher than in the first quarter of fiscal 2014.

The increase was primarily due to separation costs associated with the departure of three executive officers, which we announced in early January, and higher incentive compensation costs.

Recall that we typically experience an increase in operating expenses in the March quarter due to certain new calendar year factors such as merit salary increases, higher payroll taxes, and higher costs around our annual meeting in March. We continue to expect operating expenses for our full fiscal year 2015 to be between $132 million and $137 million.

Diluted earnings per share were a record $0.80 this quarter, which represents an increase of 78% compared to the $0.45 we reported in the first quarter of fiscal 2014. This reflects higher revenue and gross margin, partially offset by higher operating expenses, and also reflects the benefit of a lower effective tax rate.

Our effective tax rate for the first fiscal quarter was 12.3%, compared to 26.8% last year. We continue to benefit from lower income tax expense on foreign earnings, and this quarter we saw a specific benefit from the reinstatement of the US research and development tax credit. We now expect our effective tax rate for full fiscal year 2015 to be within the range of 16% to 18%, which is lower than our previous estimate of 18% to 20%.

Turning now to cash and balance sheet related items, capital investments for the quarter were $2.5 million. For full fiscal year 2015, we continue to expect capital spending to be within the range of $10 million to $15 million.

Depreciation and amortization expense for the quarter was $4.7 million. In addition, we purchased $15 million of our stock during the quarter under our share repurchase program. And as of the end of the quarter, there was approximately $110 million of authorization remaining.

We generated cash flow from operations of $21.7 million, and we ended the quarter with a cash balance of $295.4 million and have $170.6 million of debt outstanding.

I'll conclude my remarks with a few comments on recent sales and order patterns.

During the first fiscal quarter, we saw a 4% decrease in revenue from our CMP consumables products compared to the fourth quarter of fiscal 2014. Typically we see further seasonal weakening of demand in our second fiscal quarter.

As we observe orders for our CMP consumables products received this month, we see January results trending slightly below the average rate in our first fiscal quarter. However, with this years' Lunar New Year beginning on February 19th, our strong January orders to date may reflect some pre-buying before the holiday. Our expectation is for some softening of demand during our second fiscal quarter.

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

Thank you. (Operator instructions.) Avinash Kant, D.A. Davidson & Company.

Good morning, Avinash.

Good morning, everyone.

Good morning.

Welcome, David.

Thank you.

A few questions on the quarter. Of course, clearly margin upside seems to be pretty strong here and also better than the guidance. And you touched upon some of the components within the margin upside. Could you kind of break down a little bit in terms of how much was the FX contribution in the margin and how much was the improvement from higher volumes and product mix?

Yes. In total, gross profit margin percentage increased by 33.4 percentage points. Of that, foreign exchange was about 100 basis points. And that's really primarily the weaker yen versus the US dollar.

Then we also mentioned product mix and the benefit of a higher sales volume. And I would say that product mix is a bigger factor than the higher sales volume, but sales volume was also a significant contributor.

Okay. And also tax rate guidance, we understand it's coming down. But, does it include the assumption that you will have R&D credits this year also?

No. Actually the R&D credit was reenacted for 2014 but not for 2015. So in our first quarter, we recognized a benefit of three quarters of R&D tax credit from 2014, but it expired again at the end of 2014. So, this is kind of a one-time benefit in our first fiscal quarter which reduced our tax rate by around 5 percentage points, but we would not see that going forward.

And in the pads business, it looks like it was kind of down sequentially again. So, with the strength at some of your key customers like TSMC, could you talk a little bit about the variability there?

Hi, Avinash. This is Dave. In terms of pads, I'd just remind you we're coming off the previous -- Q4 of our fiscal year 2014 was a record quarter for our pads business, and it still is going strongly.

I continue to believe this is a really strong growth area for us. And we're encouraged by what we see in the pipeline, a lot of new business opportunities that we're working on, and evaluations with our customers. These evaluations and qualifications take time, but we continue to be encouraged by the future of our pads business going forward.

And final question for David, of course. As you are coming in in a pretty established company here, pretty strong relationships, what would be your key missions actually going forward over the next three to five years for the company?

All right, thanks. So, I've been with the company for over 15 years. And the company is performing well. I think it continues to be very well positioned for growth.

So, I don't see the need to make any immediate changes to our key strategies that we've talked to you about in the past, those being getting closer to our customers for our business that's primarily in Asia, continuing to push on technology leadership and innovation, and operations and quality excellence.

One thing I'd point you to is that we recently announced some changes to our executive management team. And that was an opportunity for us to move some leadership and decision making to Asia-Pacific. That's something we've been working on for a long time.

We also reduced the overall size of the leadership team by two, so we gained some efficiency there. And we'll continue look for opportunities like this to kind of fine-tune the organization. But, in general, no changes to the overall strategy for the company right now.

And last one just a comment for Bill. It's been great working with you, and best of luck. Thank you.

Thank you, Avinash.

Edwin Mok, Needham.

Good morning, Edwin.

So, congratulations to Bill for a great career, and congratulations for David for your promotion.

So, my first question is regarding -- maybe just touches on kind of the pad question that Avinash has, right? Huawei is down sequentially. They're still up quite a bit year-over-year, right? Is that a new customer penetration that you guys can highlight or talk about that -- and they would add year-over-year growth? And as we look forward, are we still mostly going to be seeing growth coming from D100, or the new product is starting to drive -- D200 is starting to drive growth?

Hi, Edwin. It's Dave. No new wins to report during the first quarter of fiscal 2014. But, we would still point to in FY 2014 we had a number of wins across a number of applications.

And as I mentioned to Avinash previously, we're really encouraged by what we see in the pipeline not only for D100, but also for some of our newer pad products. But, they take time. These qualifications take time.

Okay, that's fair. And then, go back to CMP slurry. So, tungsten has been strong for a few quarters. And I think, if I go back a little bit more, obviously has grown year-over-year, right? And I know you guys already have very strong market share in tungsten, right? So, my question is, is that mostly driven by increased number of tungsten steps at a customer site? Was it some particular call it leading edge application like in memory, logic, or FinFET, or one of those things that is driving this growth?

Right. So, when we look at our strength in tungsten over the last several quarters, it's really been broad based strength over all segments, foundry, memory, logic, and also across different technology nodes.

You mentioned some of the advanced technologies like 3D NAND and FinFET. We definitely think that those represent growth drivers for our tungsten business. So, we see a really exciting future for our tungsten product line, and I think we're seeing that in some of the growth that we've seen so far.

I see. That's fair. And then, for advanced dielectrics, I guess similar questions, right? The growth is driven more in memory or in logic? Any color that you can provide?

Right. So, for advanced dielectrics for our company, we talk about -- we have solutions that address both the advanced nodes but also the legacy nodes as well.

We talked about a product that we just launched in July. That product can address both advanced technology nodes and legacy. So, again, we look for broad based strength in that product line as well across technology nodes.

In particular, we've had a big emphasis over the last several years in further penetration in memory.

And so, remember we invested in R&D and manufacturing in South Korea in 2011. And that was really in support of gaining a stronger position within memory. So, that's been an area of focus for the last several years, and it looks like that's starting to pay off.

Great. That's very helpful. And then, recently there's some news about your leading foundry customer in Taiwan, I guess, right? There is some chatter about them losing maybe some of the foundry business at the 14, 16 nanometer node to their Korean customer. To the extent that happened, is that going to have an impact on your business later on this year?

Right. So, we have been also following the news between TSMC and that Korean customer. Obviously both of them are very important customers of ours. We wouldn't want to speculate who's going to win that business.

But, to the extent that they're both really important customers of ours, we would welcome the opportunity to continue working with them. And we have positions with them at the advanced nodes in both customers. So, I think that would be good for Cabot Microelectronics, regardless of who wins that business.

I see. Okay, that's helpful. And then last question, I guess on the gross margin. So, Bill, I'm trying to understand, right? So, you had a really strong gross margin, almost 61% this last quarter, but you maintained your full year guidance, 48% to 50%. That would kind of imply a pretty sharp drop in gross margin over the next three quarters to kind of get within that range or at the midpoint of that range. Are you just trying to be conservative, or what would drive the margin to be down so much, let's say in the March quarter or beyond?

We're obviously happy with the results in the first quarter, which the first quarter is above the high end of our guidance. It is just the first quarter, and typically we see some seasonal weakness with March being the seasonally weakest quarter. And then, you understand that quarter-to-quarter things like capacity utilization, product mix, our manufacturing yields can cause gross margin to move around quarter-to-quarter.

So, I would say it's early in the year, so we're going to maintain the guidance. But, we have a couple of more touch points through the year and we'll monitor this. And we could update if that's appropriate in the future.

Okay, that's fair. That's all I have. Thank you.

Thank you, Edwin. We'll take the next question.

Chris Kapsch, Topeka Capital Markets.

Good morning, Chris.

Yes, good morning. Just a question for David. David, congrats on your promotion. Just kind of a strategic question and maybe follow up on the question about your mission. But, if you look at as the semiconductor has grown, and a recent trend has been obviously the big getting bigger and with the disproportionate amount of CapEx being spent by the largest semiconductor producers.

I'm just wondering, as you look at that and against the backdrop of the roadmap, the technology roadmap looking forward for CMP, just what do you think -- working with those customers has obviously been a strength and being intimate with those customers has been a strength of Cabot Micro. Just wondering what you think both the challenges and the opportunities are looking forward as we progress further down the roadmap.

Right, Chris. So, you hit it right on. About two years ago, we made the decision to reconfigure how we think about research and development, really focusing on those top customers that you referenced.

I think that's going to -- they are going to continue driving the innovation in the industry, and it's really important that we stay close with them. Bill referenced our investment in South Korea. That's been very helpful for us. And I think it really should play into our strengths as the technology leader for CMP slurries and also for pads.

I think what these customers are looking for is not only innovation but the ability to supply ramps. These ramps are obviously not easy when you're talking about going from 14 and 16 nanometer. So, those -- I think those all should play into the strengths of Cabot Microelectronics. And that's something we've been working on for a couple of years, just in terms of reconfiguring even how we focus our R&D resources.

Okay, I appreciate the thoughts. And I did have a follow up on some of the considerations contributing to the favorable gross margin. I assume when you say mix, although it's a small piece of business, I guess QED has pretty high margins when the sales are relatively strong. I'm just wondering how much of that contributed, and can you talk about the backlog for that capital equipment driven business?

Sure. So, we talked about QED had a record year in 2013 but a real soft year in 2014. And as they entered our fiscal 2015, they entered with a pretty strong backlog, and so they had pretty solid revenue this quarter. They go into Q2, our second fiscal quarter, with a relatively strong backlog as well. So, that should be solid.

The margin contribution of QED is -- it's favorable. Like you say, when they have a revenue level, the machines are technology oriented, high technology, and tend to be pretty high margin. So, that did contribute some to the gross margin for the quarter. But, I would say it's more mix within the CMP consumables space that probably drove more of that.

I see. And then Bill, I think -- I believe your policy -- I mean, I understand the benefit here from the weaker yen, but I just want to confirm. I believe your policy has been to not hedge and I assume that you're not hedged. And if the yen weakness persists or got -- if the yen depreciated further, there could be sustained benefit there for the balance of 2015.

Yes. We hedge balance sheet exposure, but we don't do cash flow hedging. So, there's nothing in our income statement, gross margin, or revenue that would reflect cash flow hedging. And our results are based on kind of an average rate for the quarter.

So, I think the average yen rate for our first fiscal quarter was around 113 yen to the dollar. Current rate is more like 118. So, there is probably a little bit of tailwind there still.

Okay. Thank you.

Thank you, Chris.

(Operator instructions.) Jairam Nathan, Sidoti.

Good morning, Jairam.

Hi, good morning. Thanks for taking my question. Congratulations, Dave, on the appointment. Just the first question was with regard to your raw material costs. Is there any benefit from the falling oil prices? What kind of an impact could that have?

Yes, our exposure to oil price is pretty limited. We use plastic packaging so there is a petrochemical element, and then there is freight as we ship some of our product. Freight rates may go up and down or have a surcharge or not depending upon oil prices, but really not really any significant exposure to that.

Okay. And kind of following up on a lot of questions on the currency impact, given the way the currency has been going and also the favorable tax rate and the restrictions outside of the US, do you have any -- do you contemplate any plans to kind of move more production outside of the US now? Does it make sense?

Well, the -- we try to be close to our customers, so we built the plant in Korea to better supply customers there, for example. And we've done that throughout the history of our company.

We started out as kind of North American based company back years ago when the semiconductor industry was based here. Then we moved to Japan when the industry grew there. We have a strong footprint in Taiwan and now also in Korea as well as Singapore. So, we've -- our strategy has been to get close to our customers and try to serve them as closely as we can.

Okay. And my last question is regarding, Dave, your thoughts on capital allocation, if you could just kind of -- historically Cabot Microelectronics has kind of a focus on special dividend and acquisitions and share repurchase, and I was -- and your thoughts on that.

All right. Thanks, Jairam. Right now I don't see any change in our company's priorities for capital allocation. And they continue to be funding organic growth opportunities, share repurchase, and acquisition opportunities in closely related areas.

As Bill mentioned in our prepared comments, we still have approximately $110 million of authorization remaining on our share repurchase program. So, at this point, no real change in the priority for our capital deployment.

Okay, thank you. That's all I had.

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

Jason Ursaner, CJS Securities.

Morning.

Good morning, Jason.

Congratulations on a great quarter, and Dave on the appointment. I apologize. I had to jump on the call late. I take it someone already asked about pads, but revenue took a fairly meaningful step back from the gains last quarter. Just wondering what was the reason. Is it just some seasonality there? And then, given all the customer qualification activity looking forward, should we be expecting that to get back towards a higher trajectory?

Right, Jason. So, we did have a question earlier on pads. And just to remind, coming off our quarter four of fiscal 2014, that was a record revenue quarter for our pads business. And we still saw year-over-year growth in pads.

Maybe what we saw this quarter was just a little bit of a softening in the first fiscal quarter. But, we continue to be really encouraged by what we see in the pipeline.

And competitively, have you seen any new products or anything change on that front in terms of tunable pads or competitors to the new product line?

I think it's always been a very competitive area, and we also find it competitive. One thing that we're trying in the barrier market is to bring a barrier slurry and pad together as a consumable set. We think that can bring some value to our customers.

That's also -- the barrier market is also a high value CMP market, so that's interesting for us. It could be a growth opportunity, but that's very early on. So, we see plenty of opportunity in the pad market, but it's always been competitive, continues to be competitive.

Okay, great. I appreciate that and look forward to meeting with you shortly. Thanks.

Thanks.

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

Chris Kapsch, Topeka.

Hi, Chris.

Yes. Actually, you just touched upon something about the pad business that I was curious about. I'm looking back, and you guys have had a number of iterations trying to break into this business. And it's always kind of been like incumbents were either slurries providers or they were pad providers.

And what I was curious about is that it seems to make sense, especially at the leading edge, that you really -- especially demands at such fine geometries, that you probably need to provide a solution where a pad and the slurry work together. And that seems to be where you guys could really leverage your strength on the slurry side. I'm just wondering if in fact -- you mentioned one example. If it's evolving that way, is that going to allow you to even get more traction in the pad business and develop some momentum there?

Yes, we hope so, Chris. I think this is a really good opportunity for us. And customers are certainly receptive to this pad and slurry together as a consumable set if it provides them with value, if you can provide them with greater performance by providing the pad and slurry together than they could get otherwise. So, we're trying this out in barrier. It's really early for us, but we'll continue to update you on it. It's early.

Okay. Thanks.

Thanks, Chris. We'll take our next question, please?

Edwin Mok, Needham.

Hi. Thanks for taking follow-up, so two questions. First is on your outlook. You mentioned that is in line -- well, so far the quarter to date is in line with last quarter. But, you also talk about Chinese New Year effect. Does that mean that you believe your customer is building up the inventory of CMP consumable? I mean, that's how -- that's my understanding of how you describe it. And am I thinking about it the right way? Then how do you kind of see that consumable inventory level at your customer base?

Right. So, Edwin, overall what we see for the industry health, I'd say the industry looks pretty healthy. The IC inventories are generally on the lean side of normal.

But, the point that you mentioned is one that we're watching really carefully. Going into the March quarter, this March quarter has been historically our seasonally most weakest quarter. So, as Bill mentioned in our prepared comments, we haven't seen that yet. But, perhaps as you mentioned, the timing of the Lunar New Year this year being later in February, what we could have seen in January was some pre-buying from our customers.

That's something we're certainly going to watch really carefully. And also a number of our customers have called for kind of the typical seasonal softening to occur this quarter, in the March quarter.

Yes, there is one other element, Edwin. Remember we talked last quarter about the loss of some legacy ILD business. And I think we put that in total at about $10 million.

We experienced about $3 million of that loss in the first fiscal quarter and would expect to lose most of the rest of that in the second fiscal quarter. So, that'll be a headwind for us in Q2.

That's very helpful. And then, just talk about QED. I think last quarter you guys talked about a very strong backlog going into the New Year, and a decent report on this quarter. Is that backlog continues to be that strong and kind of extend beyond the December quarter? Any color you can provide on that?

Yes, we touched on that a little bit earlier. They entered the year with a pretty strong -- with a strong backlog really compared to how they entered in 2014 with very little backlog. So, they had a solid quarter and they're carrying in a pretty solid backlog into the second fiscal quarter.

Great. That's all I have. Thank you.

Thank you, Edwin.

That is all the questions we have this morning. I will now turn the call back to David for some closing remarks.

Thanks, Trisha. Concluding my remarks today, I'd like to reemphasize that we continue to focus on growth and development as the world's leading supplier of CMP polishing slurries and a growing supplier of CMP pads.

Looking ahead, we expect to continue to partner closely with our technology leading customers to innovate and commercialize leading edge CMP solutions to meet their challenging product performance requirements.

We are committed to continuing to provide value to our shareholders over a range of industry and macroeconomic environments through ongoing implementation of our core strategies of technology leadership, collaborating with customers, and operations and quality excellence.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.