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Operator
Good day and welcome to the Komag Incorporated First Quarter Fiscal 2006 Earnings Conference Call.
Today's call is being recorded.
I will now turn the call over to the Chief Executive Officer of Komag, Mr. TH Tan.
Sir, please go ahead.
TH Tan - CEO
Thank you very much.
Good afternoon.
I am TH Tan, CEO of Komag.
With me on the call today are Mike Russak, our CTO, Kathy Bayless, our CFO and other company officers.
Today, I will ask Kathy Bayless to discuss our financial performance for the first quarter of 2006.
Then Mike will discuss customer and market conditions.
And I will discuss operations, our outlook for the second quarter of 2006 and make a few closing remarks.
Then we will bring it up to questions.
Kathy?
Kathy Bayless - SVP & CFO
Thank you TH.
Before we begin today I would like to remind the audience that we will be making forward looking statements during this conference call.
Such as the statements regarding our outlook for the second quarter of 2006 and our expected capacity and capital spending for 2006.
These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from our forecasts.
These forward-looking statements speak as of today and you should not rely on them as representing Komag's views in the future.
We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made.
In addition to factors that may be discussed on the call, important factors that could cause actual results to differ materially are contained in our press release today announcing our first quarter results and in our recent SEC filings including our annual report on form 10-K for the year ended January 1, 2006.
Copies of these documents may be obtained from the SEC's website or by visiting the investor relations portion of our website.
The press release describing our first quarter 2006 financial results is currently posted on our website at www.komag.com.
Now I will review our financial performance for the first quarter of 2006.
Net sales totaled 208.5 million in the first quarter of 2006, compared to 192.9 million in the fourth quarter and 140.3 million in the first quarter of 2005.
This is an 8% increase from the prior quarter and a 49% increase from the year ago quarter.
Finished disc shipments were 31.9 million in the first quarter compared to 29.7 million in the prior quarter.
Full capacity for both quarters.
Unit shipments in the year ago quarter were 22.2 million.
Other disk revenue were provided 25.8 million of revenue in the first quarter, compared to 24.7 million in the prior quarter and 17.4 in the year ago quarter.
Net income and diluted earnings per share in the first quarter of 2006 were 36.2 million and $1.09 per share respectively.
This compares to 35.2 million and $1.07 per share in the prior quarter.
Net income and diluted earnings per share in the year ago quarter were 18.5 million and $0.59 per share respectively.
Our tax provision for the first quarter of 2006 was $1 million compared to 2.2 million in the prior quarter.
We currently expect the 2006 tax rate to approximate 3%.
The tax provision is primarily non-cash due to tax holidays in Malaysia through 2016.
Net margin was approximately 17.4% in the first quarter of 2006 compared with 18.3% in the prior quarter.
Operating expenses in the first quarter were approximately 11% of revenue, compared to 10% in the prior quarter.
The increase related to increase R&D spending from the acceleration of development of new advanced products.
In addition, SG&A spending included 1.8 million of FAS 123R non-cash stock compensation expense, including 1 million stock compensation expense related to accelerated vesting of options and restricted stock as we discussed in the form 8-K filed in February 2006.
We expect non-cash stock compensation expense to increase by an additional 1 million from the accelerated vesting in the second quarter as compared to the first quarter.
On our balance sheet and cash flow, we ended the first quarter of 2006 with 190.9 million of cash compared to 205 million at the end of the prior quarter and 116.5 million at the end of the first quarter of 2005.
Ending accounts receivable balance was 119.5 million compared to 116.2 at the end of the fourth quarter, reflecting higher sales in the first quarter and the timing of customer payments.
Our DSO was 52 days at the end of the first quarter, compared to 55 days for the prior quarter.
Net inventory was 72.5 million compared to 54 million at the end of the prior quarter.
The increase was for raw materials inventory to support increased production levels to meet continuing strong customer demand.
In addition, we increased the amount of inventory on hand for certain key raw materials due to tight supply and longer lead times.
Finished goods inventory decreased slightly from this prior quarter end.
Depreciation was 14.5 million compared to 12.6 in the prior quarter.
Capital expenditures were approximately 103 million in the first quarter of 2006.
Now let me turn it over to Mike.
Mike Russak - CTO
Thank you Kathy.
Sales mix by a major customer was Western Digital at 35%, HGST at 22%, Maxtor 21% and Seagate at 18%.
Shipments of 120 gigabyte per platter and above advanced disks were 24% of total finished unit shipments, about 7.5 million disks including initial volumes of the 160 gigabytes per platter disks.
This compares to 14% of 120 gigabyte per platter and above shipped in the prior quarter, which was 4.1 million units.
This is a significant move toward the higher capacity 120-gigabyte to 160-gigabyte disks including an aggressive ramp of the 160-gigabyte per platter product in the first quarter.
This aggressive ramp of 160 gigabyte is expected to continue in Q2 and beyond.
Our product mix is determined by our customers.
We ship the products that each of our customers need.
Some customers are requiring increasing numbers of 80 gigabyte per platter disks because that is what their shipment plans require, while others are pushing quickly to 160 gigabytes per platter products.
We will continue to support all of our customers and maintain a broad product portfolio to accommodate their requirements.
Enterprise disk shipments of 70 mm and 84 mm disks for 15k and 10k RPM high-end server applications total 2.2 million disks compared to 1.8 million in the prior quarter.
Our blended average selling price was up slightly compared to the prior quarter.
We expect a similar trend in blended ASP in the second quarter of 2006.
About 12% of our first quarter revenue was derived from sales of NPP sub straights and related products.
On the technology and product development fronts, Komag continues to be well positioned to support both LMR and PMR media for next generation HDD products.
We continue to develop and transfer to volume manufacturing several new products including LMR 160 gigabyte disk designs and LMR 65 mm [almag] based disk products.
We are also beginning qualification activities on 95 mm diameter desktop PMR programs with several customers.
During Q1 we successfully demonstrated production capability for PMR disks in Malaysia and made several large pre-mass production builds.
Additionally, we expended considerable resources to cross qualify several 160 gigabyte per platter products on several production tool sets.
We did this to provide maximum manufacturing flexibility going forward.
As a result of accelerated product development activity, larger than normal cross qualification activity and product and production equipment preparation for PMR manufacturing in Malaysia, R&D spending increased in Q1 as a percentage of sales compared to the prior quarter.
We expect to return to more historical spending levels as a percentage of sales in the second half of the year.
Our plate has never been more full but I am proud to say that we are up to the task.
Our advanced R&D, engineering and manufacturing teams in the US and in Malaysia have been able to dupe all of this while still shipping the largest number of finished disks in our history.
As we noted previously, our customer base commands about 90% share of the 95 mm form factor HDD market space.
Each customer will transition their products from LMR to PMR on different schedules.
As a result we expect that 160-gigabyte per platter LMR disks will peacefully coexist with 200 plus gigabyte per platter PMR disks well into calendar year 2007, if not longer.
Finally, on the 65 mm aluminum almag product front, we are qualified with 1 customer and are currently in the process of ramping this product into production volumes.
We continue to work with other drive companies who are interested in the potential of almag-based media for 2.5-inch drive applications.
Now TH will provide some further comments on the first quarter as well as our business outlook.
TH Tan - CEO
Thank you Mike.
We are extremely pleased with another consecutive quarter of outstanding performance and growth.
Our first quarter revenue was another all time high for Komag.
In fact it was the 7th consecutive quarter of sequential increases in both revenue and net income.
First quarter, 2006 revenue and net income increased 49% and 96% respectively over the prior year.
We continued to run at full capacity in the first quarter and continued to bring up new production capacity, slightly ahead of schedule with [inaudible - highly accented] finished disk shipment of 31.9 million units compared to 29.7 in the prior quarter.
With the current installation schedule for new equipment, we expect to have finished disk capacity of approximately 35 million in Q2.
In addition, we continue to proceed with our plans for capacity of 43 million disks, per quarter by the time we exit Q4 '06.
Our capacity expansions are being added in a modular fashion.
Total CapEx in 2006 is currently expected to approximate $330 million.
In our manufacturing operations, we continued our strong execution with excellent yields and productivity leading to a gross margin of 28.3% in the first quarter of 2006 while continuing to bring up new capacity, brand new products, and expand the number of programs we support.
In April, 2006 we announced a strategic agreement with Hitachi Global Storage technology, which includes some incremental capacity in early 2007.
It's important to remember that our capacity expansion plans are a part of strategy supply agreements we sign with all 4 of our major customers.
In these agreements Komag has made commitments to deliver certain levels of media and our customer have made commitments to purchase certain levels of media.
In addition, our customers are making certain prepayments for media to help mitigate the cash costs of the expansion plans.
We believe that this agreement reflects true strategic relationships with our customers and we appreciate their support.
Seagate and Maxtor have recently updated their plans for the acquisition of Maxtor by Seagate.
It is now anticipated that the acquisition will be completed during Q2.
Though we cannot predict what impact that transaction can have on industry market shares, we can say that Komag has strategic agreements with each of the key disk drive companies, that together represent near 90% of the total market for aluminum disks.
Our position as a key strategy supplier of aluminum based media to the disk drive industry provides us with a unique opportunity to focus on the increasing overall demand for our aluminum based media without being restricted by any particular shift or by our customer's market shares.
I would like to thank all of our employees worldwide for their continuing extraordinary efforts, which make this outstanding results possible.
Outlook.
Looking forward, indications for overall market demand in 2006 remains very strong.
And media and substrate capacity remain tight.
Based on customer demand, we expect total revenue for the second quarter of 2006 could increase 5% to 10% for the first quarter.
In addition, based on expected market demand, our increased capacity and our strategy agreements, we would expect to see quarterly sequential revenue growth in each quarter of 2006.
With the expected level of revenue in the second quarter, continuing high level of development work, fast ramp of multiple new programs and considering excellent factory productivity, we would expect net margin to be similar to Q1 '06 at approximately 17%.
We are very optimistic about the continuing outlook for growing demand for disk drives and disks in both traditional computer related markets as well as expanding markets for consumer electronics such as PVR, DVR, high definition TV, extra low storage, gaming and other [home] and entertainment devices.
We believe that we continue to be well positioned to benefit from this growing demand for disk drives in multiple markets and applications.
In summary, we believe we have the right financial model.
We are committed to maintaining low cost manufacturing technology leadership as we continue to strengthen our strategy customer relationships, grow our business and provide positive financial performance.
Now I turn the call over to [Tamika] to conduct Q&A.
Operator
Thank you.
[Operator Instructions]
We will take our first question from Steven Fox with Merrill Lynch.
Steven Fox - Analyst
Hi, good afternoon.
First of all, on the inventories, can you just go back and talk about specifically how much the raw materials went up for work in process and finished goods and what do you think the inventory levels are going to look like a quarter from now relative to those 3 areas?
Kathy Bayless - SVP & CFO
Basically - hi, this is Kathy, what we said was that raw materials is based - is the reason for the increased.
Finished goods dropped a little bit.
Work in process went up a little bit because of the increased production level.
And the real reason for the increase is not only our continuing ramp of production volumes but also the fact that there is some tight supply on certain key raw materials.
So we expect that will continue to carry probably a larger volume than in the past for a couple of quarters because of the tight supply.
Steven Fox - Analyst
So it's sort of flattish inventories in dollars, Kathy, for a couple of quarters?
Kathy Bayless - SVP & CFO
Yes, I don't think it's going to - it shouldn't move a lot.
Steven Fox - Analyst
Okay.
And then just on the gross margin, it was sort of flattish.
Volumes, I guess, helped.
Can you talk about how much of a drag adding capacity was on the gross margins and then maybe what the mix did to help gross margins etc?
Kathy Bayless - SVP & CFO
We don't really break that out.
I mean our business model basically is to try and achieve similar margins based upon the different products that we manufacture.
And again, I think consistently in Q1, 28% is basically the range that we've been in for the last several quarters.
Steven Fox - Analyst
Okay.
Kathy Bayless - SVP & CFO
Within our business model.
Steven Fox - Analyst
So nothing unusual then in the gross margin.
Kathy Bayless - SVP & CFO
Nope.
Steven Fox - Analyst
Okay, and then last question on the 2.5 inch disk program, is that going to be meaningful as a percentage of sales by the end of the fiscal year or how would you describe how that ramps?
Mike Russak - CTO
I think it - I think meaningful would be a good characterization.
It - right now, its difficult to very precisely forecast because this is - these are emerging applications and these are new programs coming out of our customers, so but we think it will be a substantial amount of media.
Steven Fox - Analyst
Thank you very much.
Mike Russak - CTO
You're welcome.
Operator
We will go next to Amit Kapur with Piper Jaffray.
Amit Kapur - Analyst
Great.
Thanks a lot guys.
Good quarter.
Mike Russak - CTO
Thank you.
Amit Kapur - Analyst
Just wanted a couple of questions.
Kathy you mentioned that you're buying some strategic raw materials early in the production cycle.
Can you comment on any pricing increases you're seeing for those raw materials or any other factor inputs in your production and how you're managing the impact on the gross margins?
Kathy Bayless - SVP & CFO
Amit, again the inventory is really primarily just because of tight supply so I mean with the ramp of the overall market demand as well as our ramp there's certain materials that it's just taking -- that are in tight supply and that are taking longer to get.
Amit Kapur - Analyst
Okay so you're not necessarily seeing the prices for those raw materials start to increase on you because of those tight supplies?
Kathy Bayless - SVP & CFO
Not really because of tight supply.
Amit Kapur - Analyst
Okay great, and then in terms of the ASP increases was that mainly due to product mix or was the pricing environment starting to stabilize a little bit?
Mike Russak - CTO
This is Mike.
I'm sorry, yes it was mainly due to product mix.
Amit Kapur - Analyst
Okay great.
Thanks a lot.
Operator
Moving on we'll take our next question from Rich Kugele with Needham & Co.
Rich Kugele - Analyst
Thank you, a few questions.
I guess first it's always difficult to forecast the substrates in particular.
Can you give us a general rule of thumb to think of how it should roll out through the rest of the year especially in light of how you're going to need those substrates for your own increased capacity in the coming quarters?
TH Tan - CEO
Hey, Rich, this is TH Tan.
As we told you and told everybody out there that substrate lead time for machines is actually longer than media and we have been quite lucky because we planned and we work quite a bit, a lot more nimble than other people I think.
We have enough substrate to keep up with our media needs.
Just enough, no more and no less.
Rich Kugele - Analyst
So then we should think of that column as a declining potential revenue as you ship more?
TH Tan - CEO
Well, you talk about [excellent] sales that one you can -- we are a not substrate company as you know.
Rich Kugele - Analyst
Yes, yes.
And then secondly exiting the year you'll have $43 million of capacity presumably still running at a very high utilization level.
Will the additional capacity that's required for the Hitachi agreement come from your existing footprint or just tweaking them machines a little bit more, getting a little bit more utilization?
Or do you think you'll actually have to add and require some re-jiggering of the equipment?
And then looking beyond that into 2007 should we just assume that you kind of run at that 43 million, 44 million run rate all year long or something else coming?
TH Tan - CEO
Actually it's all of the above.
Okay?
I mean you know, we have said our history in 2005, we increased productivity, we get more than what was our install capacity has put in, but we're also adding capacity.
We'll also moving machines around and economizing the footprint, all of the above.
Everything you say we are doing.
Rich Kugele - Analyst
Okay and then just lastly Mike, in terms of your own perpendicular plans can you update on us where we might be seeing perpendicular shipments?
Mike Russak - CTO
We would expect to see some shipments in the second half of this year which is what we've been saying.
The size and amount to be determined, and which is why we began our preparations early in the first quarter that we are manufacturing ready.
Rich Kugele - Analyst
Okay, congratulations again.
Thanks.
Mike Russak - CTO
Thank you.
Operator
We'll go next to Shelby Seyrafi with Kaufman Brothers.
Shelby Seyrafi - Analyst
Yes, thank you very much.
A few questions.
Maybe you can start with specifying which are the main materials which are currently tight in the inventory area?
TH Tan - CEO
First of all I start with energy, and nickel, aluminum, [prepulum] everything that you can think about.
Open a Wall Street Journal and you can see how the commodities have gone up but we are a manufacturing company that knows how to handle this so we are able to squeeze more out of what we have and we have not asked our customers to shoulder any of this cost increase yet and we have been able to report very decent gross margin and net margin.
Shelby Seyrafi - Analyst
Also one of your peer HDD component companies, Hutchinson noted that there was weakness noted by the drive companies in late March and did not rebound in early April.
Are you seeing that as well?
Maybe you can elaborate about demand, not necessarily from your point of view -- you're supply constrained, but just the general drive of business environment in general?
Did it weaken as you're talking to your customes,r for example?
TH Tan - CEO
Well I cannot comment on other companies but I think I said it in my earlier comment that we continue to see strong demand.
We never, we didn't see anything different than the last several quarters.
Continue to see that our factories are fully loaded, okay?
That's all I can say.
Shelby Seyrafi - Analyst
Okay, two more for me.
What was depreciation during the quarter?
Kathy Bayless - SVP & CFO
I think I said it was 14.5.
Shelby Seyrafi - Analyst
14.5, okay and finally how concerned are you about Seagate taking Media in now that they're going to consummate their acquisition of Maxtor probably in May, and they have the Woodlands facility in Singapore.
How concerned are you about that happening over the coming year?
TH Tan - CEO
[inaudible].
We know that Seagate is a [inaudible - highly accented] to all the deals we have signed with Maxtor, that is one.
Seagate has been working with us very closely to make sure that we continue to be a meaningrul supplier to them and we have been doing a lot altogether.
To both companies mutual benefits so any relocation of their own internal media capacity will require time and then there's growth, okay don't forget about this 13, 14% composite growth that has to be added to this overall demand. [inaudible - highly accented] fine, okay.
You know Seagate told you guys that they see substrate and media constraints this quarter and for the rest of the year, and on top of that you're going to relocate.
You're going to need more from an external source, and there's growth, don't forget about growth.
Shelby Seyrafi - Analyst
Thank you.
TH Tan - CEO
Thanks.
Operator
We'll move next to Andrew Neff with Bear Stearns.
Andrew Neff - Analyst
Three questions if I could.
One just as you talk about perpendicular recording are there a lot more steps involved?
What's the raw going from Almag to perpendicular?
Is there a different cost process?
Could you just sort of take us through it briefly?
Two, as you look at next year have you thought -- you sort of addressed this question before.
I just want to clarify, do you expect to continue to add capacity in 2007?
And then lastly, as you look at the notebook market can you talk a little bit more about when will -- I mean you said you had a design win there, can you say anything more about that?
Mike Russak - CTO
Okay this is Mike.
As far as perpendicular media there are more steps required to make the media, which is one of the reasons that throughout the industry the sputter equipment suppliers are offering tools that have more deposition chambers available to build a more complex or multi-layer structure.
So yes there's an increase in the materials going into a number of steps.
As far as the expansion goes, I mean right now our guidance is that we will exit this year at the 43 million or so million per quarter capability.
We have not commented beyond that in '07.
And finally, I think the 65mm question we've been telling about working with customers to bring -- as you know 65mm disks are traditionally done on glass substrates.
We are offering aluminum-based media into our customers' applications.
I'm not sure what the question was after that though.
Andrew Neff - Analyst
I guess the question was you said you had a -- I guess when you talk about the trade-offs in the notebook market about glass versus Almag, just in terms of what your thoughts are.
What do customers look for?
Is there a certain market that you're aiming at?
Mike Russak - CTO
Yes okay the trade-offs have traditionally been -- the reason glass has been used is because of its shock -- shock resistance so that if you incidental head slaps you will do less damage to the media and, of course, the ultimate is if you drop your laptop, and that has kept aluminum out of that marketplace because it is not as resistant.
However, with recent mechanical improvements that have been done, and with the change in the size of the heads being used, the stiffness of the suspension, in some cases actually having devices within the drive that can sense when it's falling.
We've been able to improve the shock robustness of the whole drive so that now the aluminum-based media is more suitable to those applications, so we expect to see more and more applications become available to aluminum-based media.
Andrew Neff - Analyst
And I'm just going back to your first comment on the perpendicular issue, do you expect to see any meaningful change in ASPs as you move into that market, I mean since there's more steps involved?
What's the trade off for you?
Mike Russak - CTO
Yes we, as Kathy has mentioned this, we look to price our products to get similar margins across the product set so I think as the cost goes up then it would be reasonable to think that the selling price will go up as well, but the margin is what we try and preserve.
Andrew Neff - Analyst
Thanks very much.
Operator
Moving on we will take our next question from Paul Mansky with Citigroup.
Paul Mansky - Analyst
Yes actually a few questions as well.
Following up on Andy's notebook discussion.
Can you talk a little bit -- at the Analyst Meeting you mentioned that you thought the 65mm opportunity was going to be in the millions of units this year?
Is that a number you're still comfortable with first?
Mike Russak - CTO
Yes it is.
Paul Mansky - Analyst
And can you clarify the one design win that you had is that in a notebook environment or is that in a non-notebook environment?
Mike Russak - CTO
I'm --
TH Tan - CEO
I mean until our customers announces we never do that for them.
Sorry about that.
Paul Mansky - Analyst
Okay the clarification, on the FAS 123 impact in the quarter was that a total of $1.8 million or 1.8 million just in sales and marketing?
Kathy Bayless - SVP & CFO
That was -- that was the amount that we identified in SG&A.
Paul Mansky - Analyst
SG&A?
Kathy Bayless - SVP & CFO
That was the primary impact of FAS 123R plus the accelerated divesting of the options and restricted stock.
Paul Mansky - Analyst
And you say that's going to 2.8 next quarter?
Kathy Bayless - SVP & CFO
Right.
Paul Mansky - Analyst
Okay and then lastly you've been running the business now about 17% to 18% net margin.
Inclusive of your guidance it looks like four quarters.
Within that it looks like you're running at the higher end of your target gross margin range presently.
That's a little bit offset by your comments around the R&D.
With R&D trending down in the second half of the year as you suggested plus your positive mix shift that is ongoing should we be thinking about net margin expansion above that 17% to 18% range in the back part of the year?
Kathy Bayless - SVP & CFO
Well I think we're comfortable with the range.
As you mentioned I mean that is a range that we've been running, and I think we can see from the level that we're at right now some incremental improvement.
Paul Mansky - Analyst
Incremental improvement from the 17 to 18% range or 17% absolute?
Kathy Bayless - SVP & CFO
Well, from where we are today.
I mean there's -- we said there could be opportunity from an overall standpoint to achieve above that but we're comfortable with the 17% to 18%.
Paul Mansky - Analyst
Okay great, thank you.
Operator
Moving on we will take our next question from Mark Moskowitz with JP Morgan.
Mark Moskowitz - Analyst
Yes thank you.
A few questions if I may, first did you say that your higher capacity, the shipments were only about 24% this quarter versus 36% last?
Mike Russak - CTO
What we've talked about is that 120 Gigabit and above or 24%, 7.6 million units, compared to the previous quarter 120 and above was only 14%.
We moved that capacity delineation up because the newer products are coming in a higher capacities.
Mark Moskowitz - Analyst
Okay and then if I could as far as the ASP trends it seems like you had pretty healthy improvement there and you attribute it to mix.
When I talk to some of your customers in recent weeks they seem to suggest that you are actually raising prices across the board.
Can you comment on that just given your previous conversations we've had in terms of it being in your best interest not to take advantage of the situation?
TH Tan - CEO
I [inaudible - highly accented] again, we have said that in this call conference so many times, okay we believe in long-term relationship win-win and we don't believe in raising prices to take advantage of the constraint.
But our [eventual] up mix into the 110 theater and above is going to keep us in a very good territory.
Mark Moskowitz - Analyst
Okay.
TH Tan - CEO
We'll maintain that.
Mark Moskowitz - Analyst
And then I had a question for you, Kathy, as far as the balance sheet in terms of I think you spoke about the inventories and I think your accounts payable have jacked up as well.
Can you talk about the customer advances how we should think about that in terms of the liability section?
The absolute movement from quarter to quarter seems to be slowing.
I just want to get a sense should we think of that as peaking now?
I know there's obviously some puts and takes given that some of your customers are coming and taking some -- the media there will be benefits to that as well, but can you just comment on that?
Kathy Bayless - SVP & CFO
Yes accounts payable, I mean as I mentioned before, the accounts back for the quarter was about 100 million so based up on when that was incurred during the quarter accounts payable increases because of that as well as the raw materials' inventory increase.
And as far as the -- what was the next question?
Mark Moskowitz - Analyst
All right, in regards to the customer advances it seems like the absolute movement -- .
Kathy Bayless - SVP & CFO
The customer advances, yes customer advances I mean we have -- we've been receiving the customer advances.
We still have ongoing advances that are coming in.
We also, as we've started to increase production offers, some of the new capacity we're also starting to repay some of those advances.
Mark Moskowitz - Analyst
Okay and then how should we think about depreciation?
I know we tried to ask this in the past but given the movement we've seen this quarter should we expect a similar increase of 2 million or more sequentially each quarter going forward or will it expand as you add on more capacity?
Kathy Bayless - SVP & CFO
You know I think -- I mean as far as the trend goes we've said that we do expect it to increase and we haven't -- again, we haven't commented on specifically how much that it because it's somewhat dependent upon how fast we ramp production and the rate that we bring on products.
TH Tan - CEO
Yes but this is [inaudible], regardless of the rate today, [modular] metal as we say, we [inaudible], because of how we do it our goal -- all right we are executing so far up to that goal.
We will like to make sure that the new capacities are working for us.
So we are looking at our gross margin the last few quarters.
We have to keep our machines utilized in a very high degree.
That's the way we mitigate against higher depreciation.
Mark Moskowitz - Analyst
And then this last one, I'm going to squeeze one more in if I could.
You've done a great job in terms of increasing your penetration at Western Digital where historically you've been the number two player over there behind Showa Denko.
As you butt heads more with Showa and they're bringing on more capacity as we speak particularly focusing on the second half of this year how should we think about that pricing dynamic play out just given that WD seems to be increasingly a more important customer going forward?
TH Tan - CEO
Yes, you know first of all the demand continues to grow, composite rate in double digits, and 95mm well the substrate is constraint is a key factor to keep in mind.
And then Showa did break ground for a new factory but they do it in the modular manner just like we do over multiple years.
And also they have not started to invest in their aluminum-based substrate so we don't see a lot of overlap with the new capacity with our current sweet spot which we are now occupying which is 95 and going to 65, okay Almag.
We see though Showa to be very responsible in their investment.
They don't over-queue, and we are comfortable okay and the whole world is crying out for more media.
But then aluminum-based, okay, mean substrate is actually the limiting factor and we don't see Showa doing a lot in that angle so we feel that whatever they're doing, it's not going to have an adverse impact on us.
Mark Moskowitz - Analyst
Thank you.
TH Tan - CEO
Thank you.
Operator
And moving on we will take our next question from Kevin Hunt with Thomas Weisel Partners.
Kevin Hunt - Analyst
Hi, thank you.
I just want to follow up on the option question from earlier.
First I thought I heard you say it was 1.8 million and it was out of R&D and it sounds like you like you said it was out of SG&A in response to the question.
So I just want to clarify exactly what the option expense breakdowns were?
What they were and what was accelerated options?
What was normal FAS 123 and what line items they came out of and then maybe for next quarter?
Kathy Bayless - SVP & CFO
Hi, Kevin.
Just again to clarify what we said was that basically the increase in SG&A was stock option expense so the increase in SG&A expense quarter-over-quarter was primarily due to FAS 123R and the accelerated option and restricted stock expensing and that was $1.8 million.
Kevin Hunt - Analyst
Okay so that was all in the SG&A line?
Kathy Bayless - SVP & CFO
Yes.
Kevin Hunt - Analyst
Okay and why is it going up to 2.8 next quarter?
Kathy Bayless - SVP & CFO
Because there is an additional -- there will be additional $1 million of accelerated [inaudible].
Kevin Hunt - Analyst
Okay.
TH Tan - CEO
Kevin, go back to R&D expense, okay, there is about in excess of $2 million ,you can see in our detailed K.
Kevin Hunt - Analyst
So there's no FAS123 stuff in the R&D line then?
TH Tan - CEO
No.
Kevin Hunt - Analyst
Okay and then the other question on CapEx you said $300 million now.
I thought last quarter you said 250 million so what's that extra $50 million going to since it doesn't look like you're adding to your capacity target?
Kathy Bayless - SVP & CFO
Yes Kevin the last time we made an announcement on the CapEx we said the range was 250 to 300 and that was based upon again the rate of -- that we put in equipment during the year, so right now based upon the ramp of capacity, we're at the higher end of the range.
Kevin Hunt - Analyst
Okay.
And then one final question, just on the -- the higher capacity platters, any kind of sense of -- you know, Mike said it was going to be accelerating.
Any sense of when that gets over 50% and when all your platters may be 120 or above?
Mike Russak - CTO
That would be I think too much of a forward-looking statement.
We don't -- it's hard -- it's really hard to say.
You know, as I mentioned earlier, the -- each customer ramps and transitions occur on -- in the customer's timetable and they of course are responding to their customers so I would not want to make such a prediction at this point.
Kevin Hunt - Analyst
All right.
Thanks.
Mike Russak - CTO
You're welcome.
Operator
And we will take our next question from Mark Miller with Brean Murray, Carret.
Mark Miller - Analyst
Congratulations everyone again on another great quarter.
Just wanted to clarify something, you mentioned you're going to be shipping perpendicular second half of this year.
Can I assume then that you've actually [qualed] or are we awaiting final qualification for programs?
Mike Russak - CTO
We are in late qualification stages in programs right now.
Mark Miller - Analyst
Okay, next year seems like we're going to be going through some big transitions that could impact the whole industry.
One of them's perpendicular.
The other's [cento slotter] which could also impact you guys as a learning experience.
Could we -- I mean, what's your feeling?
Are we going to have a smooth transition or are we going to have the normal drop in yields as we ramp up to these new technologies, especially in terms of media.
I mean, is perpendicular proving to be easier, harder, or how's the yields coming and what's your feeling about it?
Mike Russak - CTO
Yeah, I mean, I think historically, when the transitions have occurred, there have been reductions in things like utilization, yields and the transitions kind of represented a little bit of a step backwards until it gets going.
And I think that will be the same thing.
What I can say at this point is we have not seen any major or any fundamental issues in producing perpendicular media that would cause -- I think -- a delay in being able to translate that into the market.
You know, yields right now are not as good as they are in LMR, but we're just starting manufacturing.
So that's not a surprise.
Mark Miller - Analyst
Okay, finally, you know, I think Seagate threw us a big surprise this last conference call.
We've been hearing -- which it should be too, that the perpendicular yields have been truly impressive this early in the program and then we got hit today with a very impressive drive announcement by Seagate for the desktop.
And no one really anticipated something this quickly in the desktop.
Do you feel -- or is it just Seagate that's just really pushing the throttle here on perpendicular.
And could we expect a faster transition in the perpendicular for what you guys are seeing?
Mike Russak - CTO
I think you know, what we said is people are transitioning from LMR to PMR at different paces.
Seagate has clearly come out and said that they want to transition to PMR and they're executing that strategy.
But I don't know -- my opinion is that that's not going to necessarily make everybody else do it, you know?
And I think each person's -- each company has their own schedule in mind.
Mark Miller - Analyst
Well, would your gut feeling though, from what I'm hearing it's one of the reasons to do this -- that you know, that the yields that they're getting have been so good so far that it would make more sense if they were asked to make say, a 200-gig or 160-gig disk that they would prefer just because of the rapid progress that on a yield basis to do the 160 perpendicular.
And people who would get there quicker because of the natural advantages of perpendicular would benefit from that.
Any comments on that thought?
Mike Russak - CTO
No, I'd rather not comment on the Seagate product strategy.
Mark Miller - Analyst
Well, no, I'm just talking in general, does it make --
Mike Russak - CTO
Oh, in general -- you know, Mark, it's all trade-offs.
It's yield cost.
I mean, in each company has to evaluate that for themselves.
Mark Miller - Analyst
Okay.
Thank you.
Mike Russak - CTO
Thanks.
Operator
We'll go next to Jon Lopez with OTA Asset Management.
Jon Lopez - Analyst
Hi, thanks so much.
Congratulations.
I just wanted to revisit one or two topics you covered earlier.
The first is the gross margin -- I guess I'm just a little confused -- if you look quarter to quarter, your revenue is actually -- obviously up 8 or 9% sequentially.
Your ASPs were up.
So how is it that gross margin actually ticked down, albeit very, very modestly?
TH Tan - CEO
First of all, if you [inaudible] there are many people in this room [inaudible] gross margin and the change from quarter to quarter.
Okay?
People add capacity and fall on their face.
We add capacity and we hold our gross margin.
When you add capacity, what you do is you are adding onto existing depreciation schedule all this new machinery and then the depreciation goes up.
We make our new machines earn a living quickly by putting them to revenues and we hold our yield, hold our cost.
So we don't get similar margisn because we already operating from a high degree of utilization and efficiencies.
We say that for many quarters.
I thought it is clear.
Okay?
And is -- we take all the energies and genius of our workers worldwide to bring machines and capacity on time and [inaudible] - highly accented] to serve our customers' needs and make them earn the same margin.
Okay?
The [fractional] changes [inaudible - highly accented] you can see [inaudible - highly accented] go up or it go down.
But on the whole we are very proud of this gross margin.
Jon Lopez - Analyst
Okay.
The second question, just to come back to the inventory again for a second, and this is probably just my lack of understanding of the dynamic here but looking at your inventory, it's increased now for 5 quarters sequentially culminating this quarter with the 34% sequential increase.
When I look at your two biggest customers who just reported Seagate and Maxtor -- not your two biggest but two of your biggest customers -- Seagate's inventory increased 10% quarter to quarter and Maxtor increased 16%.
And granted obviously that's not 100% in the product that you make, but I guess ultimately my question here is in a market that is so supply constrained, how is it that inventory is increasing both onsite with you guys and at the customer level?
Kathy Bayless - SVP & CFO
Our increases again -- I mean, we said the same thing for several quarters is, the increase in our inventory has been raw materials.
So raw materials inventory basically increases as we have to -- as we're bringing up additional production volumes, we have to -- have more raw materials on hand just to be able to fill the production levels.
And this quarter basically as we said again there's -- just because of the overall demand basically for media, there's some tight supplier raw materials and so we're basically having to make sure that we buy enough in the long -- and there's some longer lead times out there right now.
TH Tan - CEO
So [inaudible - highly accented], our finished goods inventory you see going down, that's consistent with our customers saying media is in great demand.
Okay?
And it's a constrained environment.
We sold out everything.
Nothing in our [hop].
Everything's flying off the shelf, Okay?
Now in our raw materials side, it's a different story.
Here we have [inaudible], we have nickel aluminum.
They are different commodities.
And if we are going to increase our capacity you need to have more on hand.
We are working towards doing something about the raw material but that is a bigger picture that we have smaller impact on.
Jon Lopez - Analyst
Okay.
Would you actually mind just giving us the breakdown, the finished goods versus WIPversus raw material?
Because your finished goods actually went up in your calendar fourth quarter.
Kathy Bayless - SVP & CFO
Finished goods went down -- as we said, it went down slightly.
WIP went up a little bit.
It was really all increase in raw materials.
And I just don't have the specific dollar amounts.
Jon Lopez - Analyst
Okay.
It's just -- it's a $25 million increase and you only had $8 million of raw material last quarter.
Kathy Bayless - SVP & CFO
No, that's not the case, quarter over quarter.
So --
Unidentified Corporate Representative
[Inaudible].
Jon Lopez - Analyst
Clearly.
Okay.
Sorry, just one last one.
On the operating expense plan for the second half of the year, is it -- is the rampdown that you're expecting due to -- just what's the driver -- just excluding the stock compensation angle here for a second.
Are you planning to lower headcount or is it -- how will R&D actually move down?
Kathy Bayless - SVP & CFO
Basically I mean, R&D and SG&A -- what we've been running -- in the fourth quarter we ran at about 10% of sales.
And so what we said is we expect similar to run operating expenses at similar levels.
Because of the additional R&D and the stock comp we were about 11% of sales, so our comment basically is as percentage of sales, we expect in the second half that that would decrease some again.
Jon Lopez - Analyst
Okay, great.
And I'm sorry, I actually did have one more, the depreciation -- the quarterly depreciation this quarter, could you just remind me what that figure was?
Kathy Bayless - SVP & CFO
14.4 -- 14.5 million.
Jon Lopez - Analyst
14.5, Okay.
So that's an increase of about $2 million versus your quarterly depreciation in September.
Given that you're spending $100 million in CapEx in the current quarter, what is the slope on which your depreciation expense is going to ramp?
You know, as we look out -- call it 4 to 6 quarters.
Kathy Bayless - SVP & CFO
Basically we said that we haven't given out specifics on the ramp of depreciation because it's really dependent upon how fast we bring up production volumes, basically what we said in the past is that if we're increasing as soon as we bring on machines, we're basically turning them into revenue or all of our models based upon similar gross margins, as we go out through the year.
Jon Lopez - Analyst
Okay.
Thanks again for the help.
I appreciate it.
Operator
We'll go next to [James Poynter] with [inaudible].
James Poynter - Analyst
Hi.
Just two quick questions.
What was the cash flow from operations for the first quarter and with regard to R&D expense in the second quarter, are you expecting it to look similar to first quarter or up again another million or two?
Kathy Bayless - SVP & CFO
I think R&D expense we said is a -- that it would be similar -- that probably is going to maintain similar percentage of sales in the second quarter and then it will go back down as a percentage of sales in the second half.
James Poynter - Analyst
So it will be up in absolute terms if your sales are up?
Kathy Bayless - SVP & CFO
Yes.
Could be.
James Poynter - Analyst
Okay.
And cash flow from operations?
Kathy Bayless - SVP & CFO
I don't have that number with me.
James Poynter - Analyst
All right.
Thank you very much.
Operator
Moving on we'll go to Christian Schwab with Craig-Hallum.
Christian Schwab - Analyst
Great.
Thank you.
Can you elaborate on the cross qualifying activity on the 160-gigabyte platter program?
You mentioned that and I didn't get what you were trying to say there.
Mike Russak - CTO
Oh Okay.
As you know we have multiple tool sets, Okay?
Sputter tool sets.
And in order to get a product -- a customer to accept a product from one tool set, you have to go through a qualification procedure.
So what we have done in conjunction with the customer is of course to qualify more of the 160 products on several tool sets so we now have more flexibility in the factory.
And the ramp has been very steep.
And so as things shake out from the Seagate Maxtor merger, we will have the maximum flexibility to produce each customer's -- either customer's product on several tool sets.
Christian Schwab - Analyst
Right.
So in other words, if Seagate wants to order a whole bunch of their 160-gigabyte per platter equipment on dedicated Maxtor lines that you have, you'll be able to satisfy it, is that really what you're trying to say?
Mike Russak - CTO
Yes.
Christian Schwab - Analyst
Yeah, thanks.
And then on the notebook side, the aluminum drive program that's going to start shipping in millions.
Is your customer's primary concern for moving to aluminum -- is it the dollar savings over glass which I think we've talked about before it's maybe being $4 give or take.
Or is it rather technological in the fact that in order to get to 80 gigabyte per platter, 2.5 inch drive using longitudinal technology, you have to use aluminum -- it'd be very difficult to do it on glass without making a perpendicular drive, is that fair?
Mike Russak - CTO
I think the answers to those questions are yes and yes.
Christian Schwab - Analyst
Okay.
Mike Russak - CTO
Yeah, I think that --
Christian Schwab - Analyst
All right, you don't have to explain.
I get it.
My second question related to that then is if this works as well as both of you hope it does, would you expect that customer to move that -- to move aluminum drives down to the microdrive level in 2007?
Mike Russak - CTO
I couldn't really comment on that at this point.
I just don't know.
I mean, we'll see.
You know, one step at a time.
Right now it's 65-millimeter we're trying to make a beachhead there and then we'll see how it goes after that.
Christian Schwab - Analyst
Fabulous.
Thank you.
Mike Russak - CTO
You're welcome.
Operator
[OPERATOR INSTRUCTIONS].
We will go next to Shaw Wu with American Technologies.
Shaw Wu - Analyst
Hi.
Just two questions.
First, Kathy, on the tax rate on a going forward basis and then the second question is just a little more color on the -- your enterprise business, it was up nicely sequentially -- just a little more color there.
Thanks.
Kathy Bayless - SVP & CFO
I'll respond to the tax question -- on the tax rate, basically what I said was for -- we expect the tax rate to be about 3% for 2006.
And that is non-cash -- you know, we have tax holidays in Malaysia.
TH Tan - CEO
And what you want to know about enterprise?
Shaw Wu - Analyst
Yeah, just a little more color like in terms of why it was pretty strong sequentially -- just a little more color there in terms of what's going on.
TH Tan - CEO
Well, you know enterprise was stable segment, not dramatic in growth but stable and long-lasting and we like that kind of product. [Inaudible] because we fill our customers needs and the customer wants it, we'll give them enterprise.
There's really nothing we can -- nothing much I can tell you in terms of color.
It is a good product.
We love it.
Shaw Wu - Analyst
Okay.
Can you say if it was like specifically from one customer or was it across multiple enterprise customers?
TH Tan - CEO
Well, we can't tell you about that.
Sorry about that.
Shaw Wu - Analyst
Okay.
Thanks.
TH Tan - CEO
Thank you.
Operator
We'll go next to [Josh Wilson] with [O&T Capital Management].
Josh Wilson - Analyst
Hey, Kathy, I had a question on the customer advances.
Was wondering if you could let us know how much came off the balance sheet this quarter?
Kathy Bayless - SVP & CFO
We really -- we haven't given out that information.
Josh Wilson - Analyst
Okay.
Kathy Bayless - SVP & CFO
I mean, I think it's very -- in total it's fairly similar quarter on quarter balance.
Josh Wilson - Analyst
Right.
How about in terms of the total balance, could you give us some sense for how quickly you expect that to amortize given the capacity increases that you guys have talked about and the similar level of utilization of this past quarter.
Should we expect that amount to be gone in a year -- two years?
Or what's the right time frame to think about?
Kathy Bayless - SVP & CFO
Well, that's -- it depends upon the overall absolute volumes and the specific agreements with each one of the customers.
So each one can be different and has some different terms but relative timeframes I would -- it's multiyear -- we haven't said anything other than that specifically.
Josh Wilson - Analyst
Okay.
Thanks.
Operator
Moving on we'll go to Andy Neff with Bear Stearns.
Andrew Neff - Analyst
My question was answered.
I just wanted to again just to get a sense of as you look out to areas like PMR and the notebook area, can you do that on the same equipment and same line -- I just want to understand the process.
In other words, do you need to -- additional capital spending required or is it basically the same equipment?
TH Tan - CEO
The answer is absolutely yes.
Same equipment.
Andrew Neff - Analyst
And Okay.
That was my question.
Thanks a lot.
TH Tan - CEO
Thank you.
Operator
[OPERATOR INSTRUCTIONS].
We'll go next to [Chris Stipple] with Blueline Capital.
Chris Stipple - Analyst
Hi guys, my questions have already been answered.
Thanks.
TH Tan - CEO
Thank you.
Operator
We'll go next to Dan Renouard with Robert Baird.
Dan Renouard - Analyst
Thank you, just a kind of a follow up on an earlier question but can you give us the percent of a gigabyte -- and I apologize if you already answered that.
And then also you talked last quarter that that 36% that was I think 100 gigabytes and higher.
Can you give us the relevant compare this quarter or else give us the relevant Q4 comparison for 120 gig and higher?
That'd be great, thanks.
Mike Russak - CTO
Okay, I think we said the relative between Q1 -- Okay, let me turn to the right page here.
Okay, what we said is that shipments of the 120 and above were 24% in the current quarter or that's Q1 and it's 7.5 million units.
Okay?
That compares to 14% of 120 and above in the fourth quarter which was 4.1 million.
So not quite twice as many.
Dan Renouard - Analyst
Okay.
And then what percent was 80 gig this quarter?
Mike Russak - CTO
I don't -- actually don't have that information because it's 120 and below.
So, I don't have the 80 gig breakout right now.
Dan Renouard - Analyst
Okay.
Thank you.
Operator
We'll go next to [Avery San] with [Ivory Capital].
Avery San - Analyst
Hi, guys.
Nice quarter.
Thanks for taking my question.
Just wondering how you guys are thinking about utilization in the second quarter and the back half of the year, looks like to get to your guidance number for the second quarter at least, you have to assume pretty consistent utilization relative to the first quarter.
And wanted to see how you guys were thinking about it?
TH Tan - CEO
Yeah, this is TH Tan here.
Yeah, you got it right right.
Okay?
We have been showing you, have been saying that we will try to utilize the factory nearly full.
And we have a modular expansion game plan.
If we see any slackening, we will be making sure the capacity doesn't come on line too soon.
So the whole idea is to bring capacity when the demand is really there and we sell every single [spindle] capacity.
Every single inch and every single spindlewill be utilized.
And keep the gross margin at our historical high end, 58%.
Avery San - Analyst
Okay.
And just from a logistical standpoint how quickly can you kind of throttle back or accelerate relative to demand -- how much lead time do you guys need to make an adjustment?
TH Tan - CEO
Yes, cannot move any faster than we have moved, can throttle back Okay, the lead time is in excess of quarter, a quarter 13 weeks and beyond.
Okay?
Many equipment more than that, 18 weeks.
Especially on the substrate side.
So what we have planned for this year we are confident that we can bring up, Okay, on schedule but if there's a need we can throttle it downward.
Avery San - Analyst
Okay, but it's about a quarter of visibility or a quarter of lead time you need to make an adjustment up or down?
TH Tan - CEO
No, I'm saying that if you're going to move it up, it's not possible, Okay?
Avery San - Analyst
Okay.
TH Tan - CEO
Moving up is not possible.
For [inaudible - highly accented], it needs more than a quarter away, that's what I mean.
But if three's a push up and have everybody slow down.
We are very nimble people.
We can do that very quickly.
All right?
So far we just don't have the need to do so but we have the finger on -- I have my finger on this trigger anytime.
Whenever I see that there's a need, we will just tell a vendor, we don't want this product -- this equipment.
Avery San - Analyst
Okay, but clearly your vendor -- clearly your sputtering tool vendor for example needs some lead time relative to your ability to cancel an order?
What is that lead time?
TH Tan - CEO
[Inaudible] Like I said, we are looking at overall growth scenario, Okay?
The whole world higher or more, Okay?
Think about that.
Right?
We are -- but if there's any hiccup in our -- you know, say our customer landscape for whatever reason, we -- and then we have four customers we can [shop] our order -- our demand around.
But if we have to -- and so far I want to repeat -- we have not found a need to do any of that kind, Okay?
But we have to, we are prepared to slow down some weeks and our vendors are very understanding.
They understand that we are in this business that anything can happen.
Thank God so far we have not have a need to do anything of that kind that you are -- asking.
Avery San - Analyst
Okay, got it.
Thanks a lot guys.
TH Tan - CEO
Thank you.
Operator
We will now take a followup from Mark Moskowitz with JP Morgan.
Mark Moskowitz - Analyst
Thanks for taking the followup.
I was wondering if you could help us reconcile -- granted not all of your customers have presented the results and their outlook for the June quarter but if we look at what Seagate spoke about in terms of segments, trends -- and you look at also what Hutchinson commented about, kind of the Shveli's this question earlier, how can you -- you suggest your revenues are going to be up 5 to 10% sequentially.
What is the confidence level?
Is there a higher capacity mix shift that you're seeing now?
More so than just for all units going out the door for the disk drive manufacturers?
TH Tan - CEO
We have the [inaudible - highly accented] every day, Okay?
Who want more products.
What else can I do?
I cannot follow anybody else I really don't want to comment on any other people's guidance.
But what we can look at today is our products are being used by customers and they're flying off the shelf, our factories are full.
And everybody and every one of customer wants us to ship more products.
With the exception of one customer that is now going to be incorporated by another one.
Mark Moskowitz - Analyst
Thank you.
TH Tan - CEO
Thank you.
Operator
And we'll take a followup from Paul Mansky with Citigroup.
Paul Mansky - Analyst
Yeah, kind of building on that last question, maybe a slightly different angle on it.
With respect to that 5 to 10% growth that you're forecasting for Q2, how much of that is attributable exclusively to the recently signed volume purchase agreements?
TH Tan - CEO
We cannot comment Okay, a lot of timmes -- Okay, this -- one tip for you.
One hint -- [inaudible] multiple of months, Okay?
So anything that's signed you know the impact is going to be multiple months later.
We did say in our Hitachi agreement that [inaudible] increases in 2007, right?
So I want you to know that that agreement [inaudible] is impacting 2007.
And that's the way we like things to be.
Okay?
Our customers agree with us [inaudible] and then they start to prepay and different [inaudible] and then our repayment to them would be also different.
So in [inaudible] earlier Kathy's reply to another and this -- they are all staggered and that's the way we like it.
Okay?
A multiple years.
So our final 10% is just our momentum -- our bank lock and the fact that we have product that works and we are [transcending] to new products -- new programs, Okay?
And we sell both our LMR and PMR and our customers -- one customer, or two customers may have a propensity to emphasize on cutting edge and then the other customer will be want to dwell on the [inaudible] edge.
Each are successful.
Each is successful.
And we are happy [inaudible].
Paul Mansky - Analyst
I believe -- Okay, thank you for that.
And I believe that your -- with respect to your initial capacity ramp one of your customers had -- was targeted as being the recipient of the bulk of that incremental capacity, has that started to broaden out yet or and if not when do we expect that to broaden out a bit?
TH Tan - CEO
Yes, we are -- yes, as -- yes.
Paul Mansky - Analyst
Okay.
Yes to both?
Unidentified Corporate Representative
Yes.
Yes.
Paul Mansky - Analyst
Okay.
Thank you.
Operator
We will go next to Chris Stipple with Blueline Capital.
Chris Stipple - Analyst
Yes, just wanted to ask a quick question about the depreciation.
It's really more of a followup.
You've talked about some pretty significant CapEx spending over the last four quarters.
How do you depreciate this equipment that you're installing?
Kathy Bayless - SVP & CFO
Basically I mean what we've said -- I mean as far as our policy goes is we have different lives depending upon what the equipment is.
And also different lives for buildings.
So the CapEx is a combination of actually putting in physical structures within our properties, clean rooms and also equipment so the lives can range.
Equipment is typically 5 years but clean rooms and buildings are much longer.
Chris Stipple - Analyst
Can you break out the CapEx by equipment versus buildings?
Kathy Bayless - SVP & CFO
No, we haven't done that.
Chris Stipple - Analyst
So if you spent about $255 million over the last 5 quarters in CapEx, depreciation's up only $4 million.
Seems like there's a disproportionate amount of buildings versus equipment.
Is that a fair statement?
Kathy Bayless - SVP & CFO
Well, we also have very large populations of equipment that's currently been in service for a number of years so not only are we adding new but there's also depreciation rolloff of our older equipment.
Chris Stipple - Analyst
But theoretically, that older equipment will have reached its useful life, that's why you're spending the $255 million in CapEx?
Kathy Bayless - SVP & CFO
No, it's -- that equipment basically is continuing and it's continuing in service.
We've utilized all of our existing equipment for many years.
Chris Stipple - Analyst
So do you have a depreciation target -- obviously you've given us some CapEx targets for the year.
Can you give us some sense as to how the depreciation should ramp as we move through the year?
Kathy Bayless - SVP & CFO
We haven't done that, again, what we said is it's dependent upon how we -- fast we bring up the equipment, so -- I mean, obviously it takes longer to put in physical walls and clean rooms and so the ramp of depreciation is dependent upon how fast we actually can bring up the equipment into capacity.
Chris Stipple - Analyst
And generally speaking have you written off any equipment?
Kathy Bayless - SVP & CFO
Not in -- not recently.
I mean, we've been fully utilizing all of our equipment for several years.
Chris Stipple - Analyst
Okay.
Thank you very much.
Unidentified Corporate Representative
Okay, I think we have time for one last question, please.
Operator
We'll take our last question from Jon Lopez with OTA Asset Management.
Jon Lopez - Analyst
Hi, thanks so much for taking a followup.
Could you just comment briefly -- your sales to Maxtor on a sequential basis declined about 27%.
That's the largest decline you've had to that customer since you emerged from bankruptcy on a sequential basis.
Is there anything specific to that decline or was that all planned or -- any commentary on that, please?
Unidentified Corporate Representative
I mean, I'm very surprised you ask the question, you know.
I mean, the alternative to this decline is debt.
Okay?
If you don't -- if you refuse to sell and then refuse to have capacity dedicated to [inaudible] now on the verge of being acquired, Okay?
We [inaudible] press release just a few hours ago.
You can see what happened.
I think what you should be asking is how well we [inaudible] for 100% deployment of our equipment.
And answer to that is yes.
But at the expense of [inaudible] of extraordinary R&D expense in the first quarter.
But we are poised now to deploy all our capacity.
Okay?
Come what may.
All right.
With a merger, we consummate it.
Jon Lopez - Analyst
Okay --
Unidentified Corporate Representative
[inaudible] we [inaudible] to all this question and answers.
Jon Lopez - Analyst
Right.
I guess maybe I could ask it a different way.
You're still doing $44 million of revenue to that customer -- would one expect to continue to decline on this rate until it's 0?
Unidentified Corporate Representative
Well, I can do that.
Okay, but you see, we are not [inaudible] contract [inaudible].
So Seagate and [inaudible] will be treated as one, and then you know we will serve their combined need.
And we are working very seamlessly already and all this decline you saw is not driven by us, it's the reaction to something that's happening [inaudible].
Jon Lopez - Analyst
Got you.
Okay, just one last one, and I know you don't disclose, or I don't think you do -- backlog, but you've mentioned it several times.
Just qualitatively any cancelations or relocations of backlog at all or is everything just increasing?
Unidentified Corporate Representative
Well, [inaudible] declined, of course there's cancelation, right?
It would go without saying.
But that is expected and anticipated.
You know, anybody with common sense would expect this to have happened but we have [inaudible], we have [inaudible] picking out the difference that we have [inaudible] -- that's the beauty of having four customers and together form 90% of our aluminum based business.
And we have [inaudible] with everyone of them.
Jon Lopez - Analyst
Okay.
Thanks for the help, I appreciate it.
Unidentified Corporate Representative
Thank you.
Okay, I think this is the end of our Q-and-A.
I appreciate all your support and looking forward to next quarter.
Thank you.
Operator
And that does conclude today's conference.
We thank you for your participation.
You may now disconnect.