CMC Materials, Inc. (CCMP) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Cabot Microelectronics second-quarter and fiscal 2016 earnings conference call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the conference over to Trisha Tuntland, Director of Investor Relations. Please go ahead.

Good morning. With me today are David Li, President and CEO, who is participating on our call from our office in Shanghai, and Bill Johnson, Executive Vice President and CFO.

This morning we reported results for our second quarter of fiscal year 2016, which ended March 31. A copy of our earnings release is available in the Investor Relations section of our website, cabotcmp.com, or by calling our Investor Relations office at 630-499-2600. A webcast of today's conference call and a 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, 2015. 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 non-GAAP financial measures.

I will now turn the call over to David.

Thanks, Trisha. Good morning, everyone, and thanks for joining us. During our second quarter of fiscal 2016, we made significant progress on a number of strategic initiatives, notably in pads, dielectric slurries, and slurry and pad consumable sets, although our financial results reflect continued soft semiconductor industry demand conditions. This is consistent with our comments last January, when we reported results for our first quarter, and also during our Annual Meeting of Stockholders on March 8.

As we mentioned in our press release, we continue to expect stronger demand in the second half of our fiscal year, and through the first month of our third fiscal quarter, orders for our CMP consumable products have notably strengthened. Later, Bill will provide more detail on our orders to date in April.

During the quarter, we reported revenue of $99.2 million, a gross profit margin of 47.3% of revenue, and diluted earnings per share of $0.37.

Excluding amortization expense related to the NexPlanar acquisition, our non-GAAP gross profit margin was 48.4% of revenue and non-GAAP earnings per share were $0.41. We generated strong cash flow from operations of $25.4 million and paid our first quarterly cash dividend on April 15.

To provide some context for our second-quarter results, let me first offer some perspectives on the global semiconductor industry environment. Early signs in 2016 indicate that the PC market has still not stabilized. For the first quarter of the calendar year, Gartner reported that worldwide PC shipments declined nearly 10% from the first quarter of 2015, representing the sixth consecutive quarter of PC shipment declines. Exiting the March quarter, some reports suggest that NAND and PC DRAM device inventories appear to still be in moderate oversupply due to this soft PC demand.

Despite the continued soft outlook for PC demand, there are expectations for growth during the year in the smartphone, wireless network, automotive, and gaming markets. Industry reports and comments made recently by some of our strategic customers suggest that most IC inventories related to these end markets are currently at normal seasonal levels. This is likely due to semiconductor device manufacturers reducing capacity utilization and output to actively manage inventories in the supply chain.

Also, reports indicate that the earthquake that occurred in Taiwan on February 6 caused some disruption in production and also damaged some inventories. In addition, industry news indicates that the earthquakes in Japan during mid-April may have impacted elements of the semiconductor industry supply chain. Our facilities were not impacted by these events in Taiwan and Japan.

Looking ahead, based on all of this, some of our customers and industry analysts are forecasting stronger semiconductor industry demand in the June quarter compared to the March quarter and mid-single-digit growth for the full calendar year. Their general view appears to be that demand will be driven by inventory replenishments, preparation for new product launches, and the fulfillment of delayed shipments as a result of the earthquakes. This would suggest above-normal seasonal growth during the June period. And as I mentioned, we are seeing stronger demand for our CMP consumables products through April.

Now let me turn to our IC CMP consumables business, starting with pads. This quarter we continued the successful integration of our NexPlanar acquisition. Our total pad revenue was approximately $12 million this quarter, including approximately $5 million from NexPlanar. As a result, revenue from our CMP pads area grew 35% year over year. Our new global pads team combines elements from NexPlanar and our original organization, and we're already beginning to see benefits of combining research and technical resources and leveraging our global infrastructure, supply chain capabilities, and quality systems.

In particular, we are utilizing our global sales channel to broadly introduce NexPlanar pads around the world. Recall that NexPlanar had specifically focused its efforts on winning advanced applications with a limited number of technology leading customers, and was successful winning supply positions with 6 of the top 10 semiconductor manufacturers in the world. But now, as part of our Company, we can leverage our global reach to significantly expand opportunities, including both 200- and 300-millimeter platforms.

In addition, we've been delighted by the speed of qualification of NexPlanar pads and have observed several evaluations where we were qualified in less than six months, which is far shorter than our previous experience of 18 months or longer. We attribute this difference in qualification time primarily to the ability of our customers to more easily transition the NexPlanar thermoset product into their existing high-volume operations while also achieving superior defect performance. As a result, we won new business during the quarter with both existing and new NexPlanar pad customers, and in particular, opportunities where we have displaced other providers at Korean memory and Asian foundry customers.

Furthermore, since closing the acquisition, we've expanded our pipeline of new business opportunities, including combined slurry and pad consumable sets. Today, we have a sizable number of active evaluations in various stages of qualification. We continue to view pads as our most significant growth opportunity for our Company and expect to achieve revenue from our pads product area of around $70 million to $90 million in fiscal 2018, which we have previously discussed.

Turning to CMP slurries, during the quarter we advanced customer adoption of our new colloidal silica-based dielectric slurries, which we believe provide best-in-class defectivity performance. In particular, we expanded prior wins into additional fabs at a number of technology leading customers and also won new business with slurry and pad consumable sets. We expect that demand from these wins, as well as opportunities we won several quarters ago, will gradually increase through the rest of the fiscal year.

In addition, we have a strong pipeline of active opportunities around the world covering logic, memory, and foundry customers on both 200- and 300-millimeter platforms. In addition, during the quarter we made notable progress with our advanced ceria platform for dielectrics applications with leading memory customers. In the past, most of our discussion has centered on our new colloidal silica-based dielectric slurry products, but we've also been focused on developing and refining our family of dielectric products using ceria as the abrasive particle, which are primarily targeted toward certain CMP applications for memory devices.

Similar to our other solutions, customers are seeing higher removal rates and improved defectivity. As a result, we won business with one technology leading memory customer over competitive offerings in two regions this quarter and are engaged with a number of others on opportunities with our ceria-based slurry and pad consumable sets. We expect that both our colloidal silica and ceria-based dielectric slurries will be sources of profitable growth for our Company over the next several years.

Turning now to tungsten, we continue to support our strategic customers in the early production of 3D memory and FinFET for advanced logic IC devices. Both of these applications require additional CMP steps, in particular tungsten, which we believe will continue to drive profitable growth for our Company as these technologies are more broadly adopted over time. Related to this, we have seen sustained revenue growth from our tungsten products, which underscores our continued leadership in advanced and legacy tungsten applications.

In March, we were honored to have again earned Intel's most prestigious award for suppliers, the Supplier Continuous Quality Improvement Award, for the fourth consecutive year. Notably, we were recognized as one of only eight companies out of thousands of suppliers to Intel for our performance in 2015. We are proud of this repeated recognition and also of the awards we've received from other customers over the years. We believe these awards are evidence of the unique value we provide to our customers through technology, world-class operations and quality systems and infrastructure, and our close relationships with our customers.

To summarize, we are excited about our progress on several strategic initiatives, including pad growth through NexPlanar, dielectrics, and continued strength in tungsten, which, along with the improving industry environment, should position us well for a strong second half of our fiscal year and build on our foundation and momentum for profitable growth into the future. We will also continue to monitor opportunities to strengthen and expand our business through a variety of other means that could provide additional value to our shareholders.

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

Thanks, Dave, and good morning, everyone. Revenue for the second quarter of fiscal 2016 was $99.2 million, which represents a 5.4% decrease from the same quarter last year. Our second-quarter revenue reflects continued softness in demand within the global semiconductor industry, continued soft demand for PCs, and competitive dynamics within data storage applications, all of which we have previously discussed.

Year to date, revenue of $199.6 million represents a 7.9% decrease from the prior year. The decrease reflects similar factors as in the second fiscal quarter, as well as competitive dynamics in certain dielectrics applications that we have previously discussed.

Foreign exchange rate changes reduced year-over-year revenue by $1.1 million in the quarter, mainly due to the weaker Korean won versus the US dollar, and by $2.5 million in the first half, primarily due to both the weaker won and Japanese yen.

Drilling down to revenue by product area, tungsten slurries contributed 44.2% of total quarterly revenue, with revenue up 0.5% from the same quarter a year ago. We continue to see strong demand for our tungsten slurries for advanced applications, including 3D memory and FinFET. And as Dave mentioned earlier, we expect this to be a strong driver for future profitable growth.

Dielectric slurries provided 23.9% of our revenue this quarter, with overall sales down 0.9% from the same quarter a year ago. During the quarter, we saw the impact of soft foundry demand, mostly offset by revenue growth from some of our new high-performing colloidal silica-based dielectric slurry products in conjunction with our transformation of this product area, and also the advanced ceria-based products that Dave discussed.

Sales of slurries for polishing metals other than tungsten -- including copper, aluminum, and barrier -- represented 14.3% of our total revenue and decreased 22.6% from the same quarter last year. We believe this decrease was primarily due to soft demand from the foundry segment and repurposing capacity for the next technology node, particularly with respect to our aluminum slurries, which is an industry transition we've been discussing for several quarters.

Sales of our polishing pads, which include our NexPlanar acquisition, represented 12% of our total revenue for the quarter and increased 35.1% compared to the same quarter last year. We expect the NexPlanar acquisition will accelerate growth in our pads product area, and we're encouraged by the customer response and wins to date. Finally, revenue from our engineered surface finishes area and data storage products represented 3.8% and 1.8% of our quarterly revenue, respectively.

Our full fiscal year 2016 GAAP gross profit guidance range of 49% to 51% of revenue, including NexPlanar, remains unchanged. Gross profit for the quarter was 47.3%. This reflects $1.1 million of NexPlanar amortization expense.

Excluding this amortization expense, non-GAAP gross profit was 48.4% of revenue compared to 52.1% of revenue we reported in the same quarter a year ago. Other factors impacting gross profit this quarter compared to last year include lower sales volume and higher fixed manufacturing costs, including NexPlanar costs, partially offset by lower incentive compensation costs.

This quarter, we incurred some staffing-related costs that are typically associated with the first quarter of the calendar year and are generally transitory. Year to date, gross profit was 48.6% of revenue, which includes $0.7 million of acquisition-related costs and $2 million of amortization expense related to NexPlanar. Excluding these costs, non-GAAP gross profit for the first half of the fiscal year was 50% of revenue compared to 51.5% last year.

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 $34.6 million include $0.5 million of NexPlanar amortization expense. Operating expenses were $0.6 million lower than the $35.2 million reported in the same quarter a year ago. This reflects lower staffing-related costs, including incentive compensation costs, and the absence of costs associated with last year's CEO transition, partially offset by NexPlanar's staffing costs.

Year to date, total operating expenses were $70.4 million, which includes $2.1 million of NexPlanar acquisition-related costs and $0.8 million of amortization expense. We are lowering our full fiscal year guidance range for operating expenses to $139 million to $143 million, including NexPlanar. This is $2 million lower than our prior guidance range of $141 million to $145 million and $4 million lower than our original guidance range.

Diluted earnings per share were $0.37 this quarter, or $0.41 on a non-GAAP basis, excluding amortization expense related to the acquisition, compared to $0.55 reported last year, primarily due to lower revenue and lower gross profit margin. Year to date, diluted earnings per share were $0.83, or $0.98 on a non-GAAP basis, compared to $1.36 last year.

Our effective tax rate for the second fiscal quarter was 21% and 18.1% year to date. We continue to expect our effective tax rate for full fiscal year 2016 to be within the range of 18% to 21%, including NexPlanar.

Turning now to cash and balance sheet-related items, our cash flow from operations was strong this quarter at $25.4 million. Depreciation and amortization expense was $6.5 million, including approximately $1.6 million of amortization expense related to NexPlanar.

Capital investments for the quarter were $5.2 million, bringing our year-to-date capital spending to $10.3 million. For the full fiscal year, we currently expect our capital spending to be within the range of $17 million to $20 million, including NexPlanar. Previously we had indicated a range of $15 million to $20 million.

In addition, we purchased $15 million of our stock during the quarter under our share repurchase program and have purchased $25 million year to date, leaving approximately $135 million of authorization remaining.

We ended the quarter with a cash balance of $226.4 million and have $159.4 million of debt outstanding. On April 15, we paid our first regular quarterly cash dividend of $0.18 per share, or approximately $4.4 million in total, reflecting our ongoing focus on providing additional value to our shareholders.

Now I would like to offer a few comments on recent revenue and order patterns. During the second fiscal quarter, we saw a 1.1% decrease in revenue compared to the first quarter of fiscal 2016. Within the quarter, revenue in January and February was relatively even at approximately $32 million in each month. And revenue in March increased to approximately $36 million.

Earlier, Dave talked about industry expectations for stronger demand in the June quarter and reminded you of our own expectations for stronger demand in the second half of our fiscal year. Consistent with that, orders to date in April for our CMP consumables products are trending approximately 6% higher than the average rate in our second fiscal quarter.

To summarize, from a financial standpoint, as we think about full fiscal year 2016, we expect stronger demand in the second half. We are maintaining our gross profit guidance for the full fiscal year at 49% to 51% of revenue, despite the softer gross margin we just reported. And we have reduced our guidance for operating expenses for the full year by another $2 million.

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

(Operator Instructions). Edwin Mok, Needham & Company.

Good morning, Edwin.

Good morning, guys. Thanks for taking my questions. So, first question I have on gross margin. I think, Bill, in your prepared remarks you said lower volume was a big driver for that. But can you maybe give us a little more color? Did you see any kind of pricing pressure as a result of that low volume or any kind of mix change? I think your pad mix has increased relative to a year ago, and I think last year, every quarter, including the fiscal first quarter, you had over 50% gross margin. Just trying to understand what drove the big change in gross margin compared to what we've seen in the last six quarters.

Right, sure. So first, from a year-over-year standpoint, there were two significant factors. The largest was higher fixed costs, and that was largely related to the addition of NexPlanar. The year-ago quarter, we didn't have NexPlanar, so we had a full quarter in the second fiscal quarter compared to the prior year of NexPlanar costs.

Then the other -- the second-largest factor year over year was lower volume, just on 7.9% lower revenue; capacity utilization effects caused volume effects to reduce gross margin, as the next-largest factor. We had some other factors, pluses or minus, but nothing else real significant. Those were the two largest factors by far.

If you think about sequentially, we were down sequentially, and we had several factors there. There's an element of seasonality that if you look into the last -- the history of our Company, in the last 10 or 11 years, I think every year but fiscal 2013 and 2015 we've had a sequential reduction in gross margin in the March quarter. So, historically, it's seasonally weak in terms of gross margin. We also had a full quarter of NexPlanar costs. Recall that we closed the NexPlanar acquisition in late October, so we had a full -- this is the first full quarter of NexPlanar staffing costs.

There's another factor that goes into fixed manufacturing costs, and it's a phenomenon we've seen before in our second fiscal quarter, which is the first quarter of a new calendar year, and in the US, that tends to bring higher staffing costs to us. And some of this is transient. But if you -- we have about half of our workforce in the United States. And so, in a fresh calendar year, we restart payroll taxes, Social Security, unemployment tax, vacation accrual, things like that, such that we see a pretty significant increase in fringe-related costs in the first quarter and the first calendar quarter, that typically then doesn't persist. And we saw that here. Higher fixed costs were on the order of 1% on gross profit margin erosion. So that was another factor.

We had some other factors. Mix was a small adverse effect; as you saw, a higher pad percentage of our business. Tungsten held up, some [left in] metals other than tungsten, and higher dielectrics. So there was a mix effect. And then we had several smaller effects. Pricing was a small effect; foreign exchange was a small effect. We had some pluses or minuses there. But sequentially and year over year -- or sequentially, the biggest factors were the fixed costs and then this product mix effect.

Okay. (multiple speakers). Yes, go ahead.

Yes, having said that, though, I want to remind that we've reconfirmed the guidance for the full fiscal year at 49% to 51% of revenue. So with the expectation of stronger demand in the second half of the fiscal year, we would expect stronger gross margin to accompany that.

Okay, great. That's extremely helpful color there. The second question I have, particularly regarding NexPlanar, so, it sounds like you guys have good traction with NexPlanar's products, right? And I think Dave mentioned, given that [a product statement it's just easier] for a customer to transition there, any way you can give us some mix or view in terms of how much of your pad business is now NexPlanar versus Cabot's thermoplastic -- kind of your traditional thermoplastic product? And are you seeing more growth coming from the thermoset product or is the thermoplastic production stable, declining? Any kind of color you can put on that?

Yes, Edwin, first, it's been a really exciting few quarters since the acquisition, and you've seen the growth in our results. And we can definitely feel the increase in customer pull for the technology. And it is primarily coming from the NexPlanar technology. And as we mentioned, this quarter we also felt more comfortable talking about some of the wins we've been able to achieve with some really important customers in the Korean memory and Asian foundry areas.

And one of the things that has been a real paradigm shift for us, which is this faster qualification time, along with the performance benefits that customers are seeing. We're seeing qualifications, evaluations that are completed in less than six months, so that's very different than what we've seen before. And we attribute that to the closeness of the thermoset technology; customers are able to drop it in much more quickly. There's also an aspect of NexPlanar that allows faster iterations.

So, just the overall customer experience, that customer qualification time, has been really good. And overall, we're really pleased. We're preparing for significant growth in the pads area. And obviously, we will continue to update our progress. I think we mentioned the split of pad revenue, too. Right, Bill? You might remind.

Yes, total pad revenue was around $12 million, of which around $7 million was from the legacy CMC pads, the Epic pads, and $5 million was NexPlanar. The legacy CMC pad revenue has been pretty constant the last three quarters. And then we added NexPlanar, of course, starting in October.

Okay, great. That's extremely helpful. Last question I have, on the order trend, Bill, if I understand your commentary correctly, you said that your orders in the month of April was up around 6% compared to average for your second quarter. But in March, you mentioned that you had $36 million of orders? So if I look at the numbers, it's actually kind of flattish to March. Just trying to reconcile that. Is it just a month-to-month lumpiness of that, or should we read too much into it? And as you look beyond what you have booked in April, are you seeing further strengthening on your order as you get into May and June?

Yes, so, a lot of times when we talk about revenue, we don't give much color within a quarter because revenue is relatively flat. It tends to be relatively constant month to month. In this case, we had around $32 million in each of January and February, but then in March, $36 million. So we started to see some strengthening in March, and so, overall, $99.2 million of revenue in the second fiscal quarter. And then through four weeks of April we're seeing orders for CMP consumables up about 6% versus the average of that first fiscal quarter -- sorry, second fiscal quarter.

But we're mixing things a little bit. We're trying to give within-the-quarter visibility. And that CMP consumables orders, when I'm talking about monthly revenue, it's revenue for the total Company, which also includes QED and some other smaller product lines. But I think it is important to note that, yes, March was much stronger than what we saw in January and February. And then April orders for CMP consumables appear to maintain that kind of pace that we saw in March.

And Edwin, just to add some color to that, from the industry standpoint -- you are close to the industry, obviously, but PCs are still -- haven't recovered. So there's really -- we think there is some underlying demand from the other segments like automotive, smartphones, and just general inventory replenishment that's happening.

We mentioned the earthquakes. Especially in Taiwan, there may have been some catch-up because some of the chip inventories may have been damaged, so there might have been some catch-up in March/April time frame. And then from the leading-edge standpoint, 3D and FinFET were in great positions there, but they are still very early in the ramp. So, that's from the industry standpoint, from our vantage point.

Okay, great. Actually, can I squeeze one in on the dielectric win that you mentioned on the call? You said you won the leading customer on a competitive situation. Is that for an advanced product or is it for something that is running? I'm trying to -- I forgot what you said, but the newer generation, like 3D NAND, or whatever [the next DRAM is], they are not really in production yet. So I am trying to gauge if that is an opportunity that is starting to revenue contributing now, or is it more like the 2017 time frame? And if you can help disclose if that was for DRAM or NAND.

Sure. So you are talking about the ceria dielectrics win that we discussed, right?

Yes.

So, first, we haven't talked a lot about ceria, but it's a sizable market opportunity. As you know, it's primarily for memory, and it's actually an area that we've been working on for a while and have had products in the market with commercial success. But we just wanted to provide some more color to some of our newer products.

And we talked about where we displaced an alternative product with one of our newer ceria products and that the customer is ramping in two of their facilities. So we're really excited about it. I wouldn't want to comment too much more about the specifics, but we're excited about both of our -- both the colloidal and ceria. We think we've got two growth engines there in dielectrics, and really encouraged by what we're seeing so far.

So, this is something that is in production. It's not something that is still in the R&D lab, then? I'm just trying to make sure I fully understand that.

That's right, that's right.

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

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

Chris Kapsch, BB&T.

Good morning, Chris.

Yes, good morning, and I guess good evening to David. So, I had a follow-up on just the mix, both in the quarter and maybe what you've seen so far into the June quarter. So, everybody knew there was a soft industry conditions, obviously, but from what I've gleaned, it seems as though that weakness has been buffered by maybe demand. And you pointed out, David, in maybe automotive and perhaps maybe more, I don't know if smartphones -- maybe they are dumber smartphones, some of the less sophisticated smartphones.

So I'm just wondering if that showed up in your product mix, in other words, demand for products that are used at older, more mature, legacy nodes vis-a-vis the most advanced nodes. Is there any way for you to discern if in fact what you saw is a mix of the demand being skewed more towards more mature technology nodes?

Chris, thanks. I'll just make a general comment. What we've seen is we've seen continued strength from what I'd call the lagging-edge technologies. And I think a lot of that is Internet of Things, automotive, those that don't require very, very advanced CMP solutions. But we're supporting those as well.

But also, from the leading edge, I'd split it up into two areas. For the logic side, 16/14 FinFET, I still think those ramps are going slowly. For 3D, right now we're in the really early stages with only one real producer in high volume, and that's Samsung in Xi'an.

But, if you look at what's happening on the equipment side of it, you see a significant intake of equipment that's geared towards 3D. So we look at that as -- I look at that as a second-half-of-the-calendar-year-and-beyond ramp, but not so much of an impact so far.

Right, okay. So the orders that you've seen thus far in April are consistent with the kind of product mix or technology node mix that you've seen maybe in the first half of the fiscal year? Is that a fair way -- in other words, the 3D NAND adoption not moving the needle yet?

Yes. I think through April we wouldn't have specific visibility on that just through four weeks, until we get to the end of the month. But I don't think we've seen any significantly different trend than what we would have seen coming out of the second fiscal quarter.

You know, Chris, one of the things we mentioned last time was we have a pretty significant portion of our tungsten revenue from those advanced technologies, both FinFET and 3D. And I think we mentioned 13% in fiscal 2015. And from the industry side of things, it's really still that one major player out there in high volume so far, but with the others in various stages of ramping up. So still very early in that technology.

Got it. And then I had a couple follow-ups on the pad business, too. So, I think if I parse those numbers that you provided with NexPlanar's -- the addition of NexPlanar, it looks as though the legacy pad business might have been down year over year, like 20%. So I'm just wondering -- and I understand the enthusiasm over the NexPlanar adoption and the cadence of wins there, but is the legacy pad businesses -- that looks like it's a number that's worse than perhaps the industry. So I'm just wondering if -- have we taken a step back in terms of the relevance or applications for those pads? Or is it really just the industry weakness that's affecting the revenues of those -- of the D100, D200 pads?

Right. So, our organic pads, the D100, D200, they continue to be a really important part of our portfolio. In fact, on the consumable set side we made some progress, including with D100, D200 this quarter. So the pipeline continues to be strong for those products.

What I would say is, as you know, those products are primarily -- they are very strong on the foundry side. Foundry was very soft. And then there was also some additional efficiencies where customers continue to extend the pad life as well. So those were, we believe, the most significant aspects of why the organic pads were down versus previous.

Okay. And then you mentioned the six-month qualification time and how that's accelerated versus your experience with the alternative technology. I'm just wondering if that six-month time frame, is that accelerated vis-a-vis what NexPlanar was experiencing on their own? In other words, is there some accelerated topline synergy here for Cabot Micro to -- for NexPlanar to be part of Cabot Micro, in other words, with a company that brings more resources to the CMP tools and the fab?

We expect so, Chris. We've talked about this as a $70 million to $90 million business by 2018. But from a qualification time aspect, there is a technology piece, which is their thermoset technology is easier to qualify. And so, they are also able to do faster iterations.

I think what we're adding is the operational and quality excellence. We mentioned we've got the Intel award again this year, and also, just leveraging our global sales channel. They were very focused on a very limited set of customers. So having the ability to leverage our sales channel has also been very helpful, not only to speed the qualification time, but to also expand where we're trying to win positions with the technology.

Okay. And then just finally, sometimes when the chip industry conditions are soft, there's a silver lining in that it tends to free up tool time for qualifications. Just wondering if this malaise for the industry, have you seen any discernible pickup in the number of qualification opportunities that may translate into commercial wins later down the road? Thanks.

We have, Chris, but I'm not sure if the industry low utilization or -- we're going out there to market with some really different products in dielectrics. We also have advanced products in tungsten. And then we have the addition of NexPlanar. So we are -- there's a lot of exciting opportunities in the pipeline. And I think the -- if there is lower utilization, that's always helpful. But we're seeing a lot of opportunities in our pipeline for those new products.

Thank you.

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

Amanda Scarnati, Citi.

Good morning, Amanda.

Good morning. Thanks for taking the questions.

Sure.

First on China and the opportunity that Cabot has in China, China is expecting to grow its semiconductor business considerably. And with David out in China, I think Cabot is very well positioned there. Are you seeing any competitive pressure from internal Chinese companies developing slurries and pads? Or is there a really strong opportunity for Cabot to take some significant market share as China expands its manufacturing capabilities?

Thanks, Amanda. Right. So I am calling in from Shanghai, and we are excited about what's happening in China. China is an area where we have a very strong position already. And I think that's because the domestic customers in China are trying to accelerate up the experience curve and catch up with leading-edge technology players. And they know our products are used in just about every advanced technology node, so they are really interested to work with us. So we've had really good relationships with those customers and strong positions for a long time, and I expect that to continue.

And then the other aspect of China, which is there's a lot of inbound investment, Samsung putting a fab in, TSMC, UMC. And in those customers, we also have very strong relationships. And sometimes the technology is directly transferred from Taiwan or South Korea or the US. So, there, we also have a very strong position. China is one we continue to watch very closely, but we feel we're really well positioned to grow with China in the future as they grow as well.

Great, thank you. And then just another question on growth trajectory in 3D NAND. It's been touched on a little bit, but is the expectation more of calendar 2016 where we should start to really see that ramp in 3D NAND growth? Or is it more towards calendar 2017? Where are those expectations now versus where they had been previously?

Thanks, Amanda. I probably -- this is just my own perspective on things. I see the same things you do as well, which are equipment sales going into 3D are pretty strong. And that's usually a precursor to their ramping up and material sales happening as well. So I look at it as second half of calendar 2016 we will start to see more players ramping up in the high-volume manufacturing and definitely into 2017 calendar.

Great. And then the NexPlanar pads are well positioned for 3D NAND expansion; is that correct?

Yes, we'd say that their pads and their pad technology can be used across different segments, across different technologies, including in memory. We talked about a win this quarter we had in memory. And there are some unique requirements around 3D. I think that plays to our strengths. So when there's more difficult technical challenges, we like that. So whether it's tungsten, dielectrics, or pads, we feel like we're very well positioned to grow with 3D.

Great. Thank you.

Thank you, Amanda.

(Operator Instructions). Dmitry Silversteyn, Longbow Research.

Good morning, Dmitry.

A couple of follow-up questions, if I may. First of all, the 6% increase you are seeing in April orders versus the average that you saw in the three months of the March quarter, how does it compare to typical seasonality? Is this a stronger recovery than you typically see between March and June quarters? Or is this more or less normal or still a little bit subdued versus typical seasonality?

I think if you -- for the last several years we've seen abnormal seasonality. Historically in the industry, the March quarter was the weakest, we strengthened in June, September was the strongest, and then it weakened in December. I think in 2013, 2014, and 2015, we saw a departure from that historical trend. But if you look back the last dozen or so years, I think on average we've grown around 4% or 5% from March to June.

Okay, so --

From the industry standpoint, I think there's a few things happening here. One is there's some new product launches that are planned for the fall that I think there's some build happening now. And then there's also some event-driven activity around the earthquakes, where there had to be -- there was some more catch-up because of the damage in the inventory. So it may not be true seasonality. As Bill mentioned, we've seen a departure from that the last few years, but it just happens to be in the second half of our fiscal year this year.

Got it. Okay, thank you, David. Speaking of earthquakes, you mentioned a little bit of a disruption to your inventory levels and production for some of the players in Taiwan and China -- I'm sorry, in Japan. Three of your larger competitors -- Fujimi, Hitachi, and I think Fujifilms -- are also Japanese-based. Anything going on there that that will either hurt you or help you in terms of selling over the next couple of quarters as they deal with the aftermath of the earthquake?

Right. So of course, we wouldn't comment on competitors, but we're trying to do everything we can to help our customers that were affected. Our facilities were thankfully not affected by the events in Japan and Taiwan. But I think it's one of those things where you just look, as a leader of the industry, what can you do to help. And we've had some more rush orders come in. We're just trying to do what we can to help the industry in that context.

And if you think more broadly, we have a global infrastructure, where we have manufacturing facilities in the US, Japan, Taiwan, Korea, and Singapore. None of our competitors have that kind of a worldwide reach. So from a supply assurance standpoint, business continuity planning, we think we're very well positioned, and our customers respect that.

Okay. Thank you, Bill. Following up on the NexPlanar acquisition, you've talked about the benefits that you bring to the Company with your global distribution and customer relationships. Anything you are learning from the folks at NexPlanar as far as attacking the market and getting product [sets]? You mentioned obviously the adoption timeline is much shorter for their products versus your legacy products, but is there anything else that the NexPlanar team is bringing that's causing you to either reevaluate or tweak how you go to market with your pads offering?

Definitely, Dmitry. So we talked about this global pads teams that we've put together. And it's truly made up of elements from our original pad organization and also the NexPlanar organization. So, it's a combination of those -- the best of both teams. And we're certainly benefiting from their experience on how we approach customers, and they are the experts. I think where we can add in is our operations and quality systems, infrastructure, and know-how. And we're in progress of doing that. And then you mentioned the global sales channel.

For me, I think the thing that we are really encouraged about is we knew that technology was easier to qualify, but having it in our Company and seeing those qualifications that are able to be completed in less than six months, that's really something that we've been really excited about and seeing from their technology. And that's what we thought going into the acquisition, and we're very pleased with what we've seen so far.

Sounds good. And then one last question. We haven't talked about this for a while, but can you update on what's going on with the average selling price? There's a lot of mix movements right now with new product launches and -- versus legacy businesses and older products. But if you look on the apples-to-apples basis, is this still a steady to slightly up average selling price market for you?

Yes, we haven't seen any particular departure from historical trends. Over multiple years, average selling price has maintained relatively a constant level. And that's across all products. So within a product, there could be a product roadmap that would offer some customers savings in exchange for long-term commitment or things like that, but overall, across the business, ASPs, average selling prices, have been relatively steady.

And Dmitry, just from the competitive intensity standpoint, we feel like it's -- we don't see any changes in the competitive intensity. As Bill mentioned, we reaffirmed our gross margin guidance, so that should be also some indication. But the other thing about ASP is, as we move into more concentrated products, we're selling a customer a product that can be diluted many more times. The ASP is really dependent on what is the product as well. But overall pretty much normal historical.

Got you. And then just one final question on the gross margin. Given the yen/dollar exchange rate, you are still benefiting by about 1 point on your margin from the exchange rates, or has that declined a little bit as the yen has strengthened?

Well, we have really calendarized on that. If you look at the average yen last year and this quarter is JPY119 to the dollar, and the current quarter that we just completed is JPY118 to the dollar. They yen has strengthened recently, but if you take an average over the quarter, not really much of an effect year over year.

Okay, but if it continues to strengthen, that would be a little bit of a headwind for you in terms of margin? Obviously you are still reiterating your range, but is it likely that we're going to be towards the bottom of that range if we get yen continuing to inflate and get close to JPY100 to a dollar?

Well, I think it was, what, JPY109 today, something like that. So a stronger yen would -- yes, is adverse to us from a gross margin standpoint. But, yes, we're comfortable with our range and really wouldn't want to pick a spot within that range because there are other things besides foreign exchange -- product mix, capacity utilization -- that have an impact on gross margin. So we just want to maintain the range that we've given.

Fair enough. Thank you, Bill.

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

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.