使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good afternoon, everyone and welcome to Komag's Third Quarter 2006 Financial Results Conference Call.
Today's conference is being recorded.
The Company reminds the audience that they will be making forward looking statements during this conference call, such as the statements regarding for the outlook for the fourth quarter of 2006 including revenue, net margin, expected capacity and capacity utilization, trends and average, selling prices and cash availability.
These statements regarding PMR shipment levels, product qualifications and product transitions in the fourth quarter of 2006 and 2007, the statements regarding overall market demand, demand trends and market growth opportunities.
These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the Company's forecast.
These forward looking statements speak only as of today, and you should not rely on them as representing Komag's views in the future.
Komag undertakes 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 in this call, important factors that could cause actual results to differ materially are contained in the press release issued today, and in Komag's third quarter 2006 financial results and in the Company's recent SEC filings, including the annual report on form 10-K for the year ended January 1, 2006 and 2006 quarterly reports on Form 10-Q.
Copies of these documents may be obtained from the SECs website or by visiting the investor relations section of Komag's website.
The press release issued today describing Komag's third quarter 2006 financial results is currently posted on the company's web site at www.Komag.com.
At this time I would like to turn the call over to Mr. Tim Harris, Chief Executive Officer of Komag.
Please go ahead, sir.
Tim Harris - CEO
Good afternoon.
This is Tim Harris, CEO of Komag.
With me on the call today are Kathy Bayles, our CFO;
Ray Martin, our EVP of Sales and Customer Service;
Ed Casey, our C00; and other company officers.
Our CTO Tom Yamashita is traveling and is unable to join us.
Today, I will provide an overview of Komag's third quarter 2006 results.
Kathy will discuss our financial performance and Ray will discuss customer and market conditions.
I will then discuss operations, our outlook for the balance of 2006 and make a few closing comments.
We will then open the call to questions.
First, let me say how pleased we are of Komag's record operational and financial performance over the last several years.
Komag is a company that truly emphasizes excellence and execution in all areas, and I am both pleased and very proud to have the opportunity to lead this organization.
I believe very strongly that the opportunities for Komag and the entire disk drive industry have never been better.
The digital revolution is here and with it the explosion of digital content.
This content needs to be stored, and there's no better device in terms of mass storage capability, performance and price than the hard disk drive.
We are now seeing hard disk drives in not only computer applications, but in a variety of other devices including home entertainment systems, automobiles, portable applications and security devices.
This growth in demand for hard disk drives creates the increasing demand for Komag's high performance disks.
With a growing market and our continued focus on strong execution and performance, we are pleased to achieve another consecutive quarter of revenue growth and solid earnings.
Overall revenue increased 33% in the third quarter of 2006, compared to the prior year's third quarter.
Third quarter 2006 net income, however, was impacted by a slower shipment rate early in the quarter, significant compensation expenses for some retirement executives, a steep graph of new products in 95 mm PMR products development activities.
We target to run our factories as close to 100% utilization as possible, as our financial model is sensitive to capacity utilization.
As a result, we decided to slow our capacity expansion for the current quarter.
We exited Q3 with a capacity of around 40 million disks per quarter, and we expect to hold that level stable in Q4.
We continue to monitor supply and demand closely and do not expect to add additional capacity until we are fully convinced that the demand is there for us to operate as close to full utilization as possible.
The decision as to when to add capacity is always something we take very seriously.
We continue to work closely with our customers and we will add capacity as appropriate.
Now, let me pass the call over to Kathy to discuss the third quarter financial performance.
Kathy.
Kathy Bayles - SVP & CFO
Thank you, Tim.
Komag has achieved another strong quarter of revenue growth and profitability.
Net sales totaled $239.6 million in the third quarter of 2006, compared to $233.6 million in the prior quarter and $180 million in the third quarter of 2005.
This is a 2.6% increase from the prior quarter and a 33% increase from the year ago quarter.
Finished goods shipments were $38.1 million in the third quarter, compared to $36.6 million in the prior quarter and $27.5 million in the third quarter of 2005.
Other disk revenue provided $23.2 million of revenue in the third quarter of 2006, compared to $23.6 million in the prior quarter and $24.3 million in the year ago quarter.
Net income and diluted earnings per share in the third quarter of 2006 were $34.5 million and $1.04 per share respectively.
Second quarter net income and diluted earnings per share were $40.3 million and $1.21 per share respectively.
Net income and diluted shares in the year ago quarter were $32 million and $0.97 per share respectively.
Our income tax rate for the third quarter of 2006 and year-to-date is approximately 2.5%.
The tax provision is primarily non cash, due to tax holidays in Malaysia through 2016.
Net margin was 14.4% in the third quarter of 2006, compared with 17.2% in the prior quarter.
Operating expenses in the third quarter of 2006 were approximately 11.5% of revenue, compared to 10.8% in the prior quarter.
R&D spending includes continuing accelerated development activities for new advanced products, including PMR.
SG&A spending in the third quarter of 2006 included $2.9 million of executive retirement compensation expenses, primarily for non-cash stock compensation.
The second quarter of 2006 included a $2.1 million charge for non-cash stock compensation related to executive retirement.
For the nine month, year to date period, these charges totaled approximately $6 million.
These charges were completed in the third quarter of 2006.
In addition, other FAS 123R non cash stock compensation expense for stock option amortization was $600,000 in the third quarter and $2 million for the nine month year to date period.
Depreciation for the third quarter was $22.1 million, compared with $18.3 million in the prior quarter.
Depreciation in the year ago quarter was $11.2 million.
On our balance sheet and cash flow, we ended the third quarter of 2006 with $164.6 million of cash, compared to $190.2 million at the end of the prior quarter and $178.9 million at the end of the third quarter of 2005.
Our ending accounts receivable balance was $151.7 million compared to $128 million at the end of the second quarter of 2006.
This receivable balance reflects higher sales in the third quarter and the back end load in nature of the third quarter.
Inventory was $88 million at the end of the third quarter of 2006, compared with $75.4 million at the end of the prior quarter.
Finished goods inventory at the end of the third quarter was $12.9 million.
This includes inventory at all customer hub locations and represents less than two weeks of inventory based on the shipment rate in the third quarter.
This inventory will support the shipment levels needed at the beginning of the traditional front end loaded fourth quarter.
We increased the level of certain raw materials and work in process in the third quarter to move from air to ocean shipment to reduce freight costs.
We also continue to maintain a high level of raw materials to be able to support long lead times for some key materials.
Capital expenditures decreased significantly in the third quarter to $41.1 million.
Total capital expenditures were $240.5 million for the nine month year to date period.
Operating cash flow in the third quarter was $44 million and $203.9 million year-to-date.
Now let me turn it over to Ray.
Ray Martin - EVP, Customer Sales & Service
Thank you, Kathy.
We shipped a total of 38.1 million disks in the third quarter of 2006.
This represents a 4% increase over the 36.6 million disks shipped in the prior quarter.
Sales mix by customer was Seagate at 38%, Western Digital at 34% and HGST at 24%.
Shipments of 160 gigabyte per platter disk increased to 33% of total shipment in the third quarter.
Total shipments of 120 gigabytes per platter and above disks, including the 160 gigabyte disks, were 54% of total finished unit shipments.
This compares to the 44% of 120 gigabyte per platter and above disks shipped in the prior quarter.
Our enterprise shipments declined to 3% of total shipments in the third quarter, compared with 5% of shipments in the prior quarter.
We expect that enterprise shipment will not be material going forward because the HDD programs they support are being phased out.
As we have discussed previously, our customers' product plans determine our product mix.
We ship the products that each of our customers need.
Our customers require large volumes of 80 gigabyte per platter disk, while others are moving quickly to 160 gigabyte per platter and PMR products.
We will continue to provide flexibility in our manufacturing operation to support all of our customers and maintain a broad product portfolio to meet their requirements.
Our overall blended average selling price in the third quarter was down slightly from the prior quarter and flat with the year ago quarter.
The slight drop in ASP was related to mature products and reduction in enterprise shipments, which have a higher ASP than desk type products.
About 10% of our third quarter revenue was derived from sales of NPP substrates and related products, consistent with the prior quarter.
Our new customer and product qualifications are going well.
We are now qualified in shipping 65 mm aluminum media to two separate customers.
We have been qualified by a new media customer, Samsung.
With Samsung, our customer base now covers close to 100% of the aluminum market for media.
In addition, we are now qualified in shipping to a new 95 mm aluminum PMR program.
We expect to ship a significant amount of PMR media in Q4 2006 and we expect the volume of PMR media to increase over the course of 2007.
Now, Tim will provide some further comments on the third quarter, as well as our business outlook.
Tim Harris - CEO
Thank you, Ray.
We achieved record revenues of $239.6 million, a 33% increase over the prior year's quarter.
We operated at around 95% utilization on a sales basis, shipping 38.1 million disks against installed capacity of 40 million disks.
In our manufacturing operations, we continued our strong execution with excellent yield and productivity while continuing to ramp many new products.
We expect to maintain our current installed capacity of 40 million disks a quarter in Q4 2006.
Total capital spending in 2006 is expected to be approximately $290 million, down from our previous expectations.
During Q3 2006 we consciously built additional finished goods inventory to allow us to meet the customer's front end loaded demand scheduled in Q4 2006.
Q4 tends to be the most front end loaded quarter with a very high level of demand in the first two months of the quarter due to the holiday season.
This decision allows us to meet customer requirements and not add more capacity than we need exiting Q4.
In addition, raw material and work in process increased due to both the front end loaded demand in Q4 and also to allow for lower cost ocean shipping.
We are very pleased to be qualified in ramping production with Samsung.
Initially this is for our 65 mm aluminum products.
In addition, we are working with Samsung on several 95 mm programs which are now in qualification.
Our position as a key strategic supplier of aluminum based media to the disk drive industry provides us with the unique opportunity to focus on the increasing overall demand for aluminum based media without being restricted by any particular ship among our customers market share.
I would like to sincerely thank all of our employees for the excellence of their continuing efforts which make these results possible.
Looking forward, we expect overall market demand to be strong for the remainder of 2006 and media and substrate capacity to remain in good balance.
We are currently qualified and shipping new PMR media for 3 1/2 inch disk drives.
We expect the level of unit shipments in the fourth quarter to be significant and to continue to increase over the course of 2007.
We currently expect Q4 2006 revenue to increase by up to 5% from Q3.
With expected higher capacity utilization, continuing an aggressive product transition and a reduction in the blended ASP, we expect net margin in Q4 to be in the range of 15 to 17%.
While we expect a reduction in the blended ASP for Q4 due to pricing of older, mature products, the average ASP trend over the past four years has fluctuated in a very tight band.
We do not see this trend changing and we expect the overall blended ASP to trend upward, beginning in 2007 as 160 gig and PMR products replace the older products.
We expect our overall cash balance to be stable with Q3.
We are very pleased with our technology leadership.
Komag is qualified and ramping 95 mm PMR products.
In addition to our 95 mm PMR product development activities, we are working on advanced 65 mm PMR designs for both aluminum and glass products for shipment during 2007.
The 65 mm market is large and growing and is, therefore, a significant opportunity for Komag.
With the transition to PMR the timing is now appropriate for Komag to produce both glass and aluminum 65 mm products to fully meet our customers' needs.
We expect that over the course of 2007 all of our customer base will begin to transition to PMR products.
Komag is prepared for this change and is ready to support our customers' needs.
We remain very optimistic about the growing trend for disk drive and disks in both the traditional computer related markets and the rapidly expanding markets for consumer electronics 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 that we have the right financial model.
We are committed to maintaining high quality, low cost manufacturing, technology leadership, and to growing our business through excellent customer support and providing strong, ongoing financial performance.
Now I will turn the call over to Matt to conduct the question and answer session of the call.
Operator
Thank you very much. [OPERATOR INSTRUCTIONS].
And the first question comes from Rich Kugele with Needham & Co.
Rich Kugele - Analyst
Thank you.
Good afternoon.
You spent, or you're going to be spending, I guess close to $300 million in CapEx here in 2006.
What are your expectations, at least directionally, for 2007?
And can you comment on any plans you might have for both the Delta there as well as the significant cash flow you seemed to be able to generate in 2007?
Tim Harris - CEO
Hi, Rich.
Thank you.
We're planning on spending now less than $300 million for a very significant increase in capacity in 2006.
We have basically completed that as far as we're taking it at the moment.
We expect, therefore, to have substantially reduced CapEx in 2007.
I think it's worthwhile to take a look back in history.
If you look at previous periods when Komag was not expanding capacity rapidly, and if you were to relate that to the level of operations we have today, you would, I think, see that we would expect to spend on the order of $100 million CapEx in 2007.
And I think that's probably a pretty reasonable place to start.
Secondly, that will obviously be a very, very good thing for cash flow.
We expect to generate significant cash in 2007.
We don't have the 2007 plan completed yet, so I can't be really more specific.
But in terms of direction, it ought to be very substantial.
Rich Kugele - Analyst
Okay.
And then, if you could help out a little bit with just some logic.
Industry analysts have generally ranged between 10 and 15% for unit growth in 2007 year over year.
And so even with the implementation of perpendicular, do you expect platter shipments to relatively track the industry growth rate?
Tim Harris - CEO
Yes, absolutely.
We expect to have double digit growth in platters.
We see that being driven by a number of different things, certainly the consumer electronics with the PVR, DVR, all of those applications.
There's a very significant -- consumers are looking for substantially increased storage capacity in those devices.
So that's really helping to pull the multi-platter application.
We definitely are seeing the beginning of the PMR transition.
And certainly as we go through 2007, we expect the platter count to remain consistent with where it is today and we expect the growth in media, in media sales to be in line with the growth in hard disk drives.
Rich Kugele - Analyst
And so really for you coming out at 40 million a quarter, more or less, you're pretty much going to be needing all of that throughout the year and then that last installation amount probably at some point later in the year.
It seems that just even keeping up with demand, you're going to need everything you have.
Tim Harris - CEO
Yes, it's going to be a very busy year for us and we see very good utilization of equipment.
I think even after you take the seasonality into account, by the end of the year we're going to have to be creative in creating extra capacity to meet the demand.
Rich Kugele - Analyst
Okay and then just secondly here.
Kathy, what should we anticipate for a kind of go forward stock compensation expense now that the TH and Mike Russak are no longer there and not having that extra stock comp expense?
Kathy Bayles - SVP & CFO
Well, I think as I pointed out, those activities were - - we completed that activity in the third quarter.
The total amount due to the two executives was $2.9 million and year to date was six.
On a go-forward basis, I would obviously take out the $2.9.
We will have ongoing stock compensation for the remaining population and we have regular programs for - - expect to have additional grants on an annual basis.
Rich Kugele - Analyst
But something like 6 or 700,000.
Is that a good base?
Kathy Bayles - SVP & CFO
Well, I think what I would do, as far as G&A expense goes, we would expect G&A expense to come down on an absolute basis because we won't have those additional charges.
I wouldn't take out the full amount because again there will be some additional grants on a regular basis.
Rich Kugele - Analyst
Okay and then I guess now that you are shipping perpendicular and beginning to qualify with customers, should we anticipate R&D starting to decline as well?
Kathy Bayles - SVP & CFO
On R&D I would say we do expect continuing R&D expense because of the perpendicular activities, especially in Q4.
I think we would look to R&D to be at a similar level.
Rich Kugele - Analyst
At least in Q4?
Kathy Bayles - SVP & CFO
Right.
Rich Kugele - Analyst
Okay and one last thing on the convert.
Any updates on what you anticipate happening there in February?
Kathy Bayles - SVP & CFO
Well, I think it would be - the first time that we could have the potential to do a redemption would be in early February, so we would continue to look at it at that point.
Rich Kugele - Analyst
Okay.
Thank you very much.
Operator
And moving on we will hear from Kevin Hunt with Thomas Weisel Partners.
Kevin Hunt - Analyst
Thank you.
A couple of questions.
So just to go back to the stock option question.
Was the $2.9 only just those executives?
What was your total stock option expense?
Kathy Bayles - SVP & CFO
Kevin, in Q4 the additional compensation expense which was primarily stock related, was $2.9 in the third quarter.
And what I said was on top of that we have ongoing FAS-123R stock option amortization of about $600,000 in Q3.
Kevin Hunt - Analyst
Okay.
So $2.9 is all your FAS-123, not just executives?
Kathy Bayles - SVP & CFO
No, the $2.9 is just for those two executives.
So that's the part that ends.
Kevin Hunt - Analyst
Okay.
Kathy Bayles - SVP & CFO
On top of that there was another$600,000 of regular stock option amortization that's running through.
Kevin Hunt - Analyst
Okay.
Kathy Bayles - SVP & CFO
We would continue to have some amount of that plus ongoing amortization for regular kind of new grants.
Kevin Hunt - Analyst
OK.
And so, was that [inaudible] in SG&A line then, that stock option expense?
Kathy Bayles - SVP & CFO
The additional, right, for the executives, that was in SG&A.
And the other stock option amortization, it's spread.
Kevin Hunt - Analyst
Okay.
Kathy Bayles - SVP & CFO
From an SG&A and other areas depending on where the payroll cost is.
Kevin Hunt - Analyst
Okay.
Now you had a kind of bump up in R&D costs this quarter.
Were any--?
Kathy Bayles - SVP & CFO
Yes, R&D was primarily due to a lot of the transition activities and work on PMR.
Kevin Hunt - Analyst
Okay.
Now were there any other hidden costs from the executives leaving in any of these numbers?
Kathy Bayles - SVP & CFO
No.
Kevin Hunt - Analyst
No?
Okay.
Kathy Bayles - SVP & CFO
No, as I said, for the nine months it was $2.9 this quarter, last quarter $2.1 and then for the entire year it was about $6 million.
Kevin Hunt - Analyst
Okay and one last thing.
Any comment on PMR margins?
You kind of indicated ASPs turning up, but can you say anything about like PMR, ASPs and/or margins relative to the average now?
Tim Harris - CEO
Sure Kevin.
This is Tim.
The PMR disks are inherently more expensive to make because we deposit more material; the layers are simply thicker.
Over time we will get the line performance utilization, etc. of PMR to match the LMR, or close.
So ultimately, the difference in cost will be based on the additional material that has to be required.
We fully expect that since the PMR is the more expensive disk that the ASP will go up accordingly and that we will maintain the same margin on a PMR disk as we would on a modern or late-generation LMR disk.
Kevin Hunt - Analyst
Okay.
And actually, sorry, one other thing.
I missed the number you said for enterprise this quarter.
Like 3%?
I just missed you.
Tim Harris - CEO
Yes, that's correct.
Kevin Hunt - Analyst
Three?
Okay.
All right.
Thank you, guys.
Tim Harris - CEO
Thanks, Kevin.
Operator
And now we'll hear from Mark Miller with Brean Murray.
Mark Miller - Analyst
Yes, a quick question.
Just a lot of concern about subtraction of opportunities in 2007, but it occurs to me, what you told us today, is between Samsung new 65 mm and the possibility of glass.
You actually have some real opportunities in terms of growing new programs beyond where you were at.
Now you quoted a 10% organic, which is basically just the organic growth, but these are certainly appearing to me to be new programs.
I'm just wondering about any feeling for the magnitude if you're looking at combination, this could be 10, 20% on what you didn't have contributing to next year.
Did you contribute anything this year?
Tim Harris - CEO
Yes.
No.
I think that's exactly right, Mark.
I don't think we can put a number on it yet, but you know it's extremely substantial.
You take a look at the market share, for example, that Samsung has.
That's a very large opportunity.
You take a look at the rate of growth on the 65 mm glass; again, a very fast opportunity.
We are very comfortable with our relations with our existing customers and I think we are taking all of the right steps to in fact increase the total available market with combination of the two.
We feel really good about what 2007 is going to look like.
Mark Miller - Analyst
I guess another thing -- trying to carry it one step further again.
It seems to be you're going to have a significant reduction, at least in the first half on capital spending.
Would it be natural --you could see some cost savings also because you'll be doing so many quals and the fact is that, that could also help you in terms of cutting some of the expense because there are so many new programs you're having to come up with because of PMR and the [Maxtor exit]?
Kathy Bayles - SVP & CFO
Mark, this is Kathy.
I think related to R&D, there may -- as we go forward on a percentage of sales, we would expect that a percentage of R&D on a percentage of sales basis, would start to decrease.
And that's about all we can look at right now.
But you're right.
We have a lot of qualification efforts going on, especially intercepting glass as well as Samsung's programs.
Tim Harris - CEO
I would say too, Mark, that there's always a dynamic where on the one hand you have material costs going up, like aluminum, nickel, platinum; those costs going up.
On the other hand we have extremely effective and focused efforts at the factories, all of the factories, to take cost out.
And so, how that ends up kind of varies by quarter, but it's something that the team here is really good at executing on and really focused on.
And obviously, for the next year or so, that's just a critical area of focus, on us managing costs and taking costs out wherever we can.
Mark Miller - Analyst
Just one final question.
Glass has been around a long time.
I'm sure you guys, even though it's not your chief art form, I'm just feeling that that will be a relatively --I'm not trying to minimize the abilities of your R&D team, but there's a lot of knowledge about glass.
I would expect you'd be able to ramp that program fairly quickly?
Or am I being too optimistic here?
Tim Harris - CEO
We're pretty optimistic about it too, and again I can't commit to anything yet.
The key things are the customers are pulling really hard.
They're working very closely with supporting us.
Komag's got a history of doing glass.
There are obviously substantial differences yet between glass and aluminum, but we think we have our hands around them.
There will be some reasonable time necessary to convert the lines to PMR glass capability.
So it's not something I'd expect volume in the next quarter or so, but we do expect to be both substantial and soon.
The key, I think you touched on something that's really key, the timing of all this is totally appropriate because we're -- really the market is transitioning from LMR to PMR on the 65mm format and we've got a tremendous amount of expertise on PMR.
And so this is just a really natural transition point, a natural transition time for us to really go after the 65mm glass in a big way.
And I think our customers see that as well, which is one of the reasons they're pulling hard for us.
So, we're extremely optimistic.
Mark Miller - Analyst
Sounds like you got the Triple Crown here.
Better product mix, lower cost and significant new programs.
I look forward to it.
Tim Harris - CEO
Thank you.
Operator
And our next question comes from Andrew Neff with Bear Stearns.
Andrew Neff - Analyst
Sure.
Two things if I could.
One, if you could just take us through the Samsung relationship.
In your other relationships you have sort of commitments and different types of contracts.
You talk about the Samsung relationship what type of relationship that is?
And second, just in terms of the flow for next year, would you expect to add some capacity over the course of the year or just this quarter?
Can you talk more about where your capacity plan is?
Where do you expect to be by the fourth quarter of next year?
Tim Harris - CEO
Okay.
Let's see.
First with Samsung, we're working with Samsung to qualify in -- on both -- we are qualified in 65mm aluminum programs and we're looking, working hard on qualifying in on several 95mm aluminum programs.
I'd say that that's going well.
Obviously, there's a lot involved in establishing that new customer.
So, it does take time.
It does take a lot of effort.
But again, it's a very good customer.
They've got very good technology.
They got good designs.
And I think we're working well together.
So, it's a good relationship and it will grow stronger over time.
Now, in terms of capacity, and it's a really good question.
It's our philosophy is we want to have exactly as much capacity as the customer needs.
We don't add capacity just to add capacity.
Our financial model is very sensitive to running at high utilization.
Furthermore, I think if you look at our track record we are just exceptionally good at accelerating capital and capacity expansion when we need it and also slowing it down when we don't.
We spent the whole first half of 2006 just accelerating it as fast as we could and then got to Q3 and we slowed it down, I think equally dramatically.
So we will basically add capacity as our customers require it.
I guess we don't have our numbers, as I've said we don't have our 2007 plan nailed yet.
We think that there'll probably be what we consider normal seasonality and we have enough capacity coming out of Q4 to meet the next couple quarters.
What we'll do in Q3 and Q4 will really be determined by what the customers need.
We're certainly able to rapidly increase if we need to and if we don't, we'll just continue to run at this capacity point.
Andrew Neff - Analyst
Thank you.
Tim Harris - CEO
I guess I should also add that we do believe that the market is growing strongly.
It's a long term there's very, very good prospects.
But again, we don't ever add capacity until we have a customer's name next to it.
Andrew Neff - Analyst
Thank you.
Tim Harris - CEO
Thanks, Andy.
Operator
Moving on, we will hear from Paul Mansky with Citigroup.
Paul Mansky - Analyst
Great.
Thank you.
Tim, maybe one for you; and then Kathy one for you.
Building on the last two questions, Tim, did I hear you correctly saying that you plan to transition [out mag] capacity to satisfy the glass opportunity?
Tim Harris - CEO
Yes.
Sorry?
Paul Mansky - Analyst
As opposed to that being incremental capacity?
Tim Harris - CEO
Yes, no we think that at least in the beginning it will be in incremental capacity.
We have the opportunity since we capped our expansion; we do have incremental capacity we can turn on as that market requires it.
Paul Mansky - Analyst
Okay.
So that's not capacity coming out of one program and shifting into another?
Tim Harris - CEO
We don't envision it that way.
Paul Mansky - Analyst
Okay.
Great.
Thank you.
And then Kathy, in your 10-Qs, you break out debits and credits with respect to that accrued liability line.
Looks like accrued liability uptake again this quarter.
Can you give us a preliminary breakout between debits and credits?
Kathy Bayles - SVP & CFO
On accrued liabilities?
I think the-
Paul Mansky - Analyst
Specifically, the customer advances.
Kathy Bayles - SVP & CFO
The customer advances, yes.
On a net basis the balance on customer advances has increased a couple of million dollars, so we're still in the process of – we're still receiving some customer advances in.
We received some in during the quarter for the expansion and we've also been repaying some of the advances for the capacity that we installed, starting at the end of 2005.
Paul Mansky - Analyst
Do you anticipate further advances coming through?
Kathy Bayles - SVP & CFO
I think we have some more advances still scheduled for Q4 and then that should be the end.
Paul Mansky - Analyst
Great.
Thank you.
Operator
Next up we will hear from Amit Kapur with Piper Jaffray.
Amit Kapur - Analyst
Great.
Thanks a lot.
Sorry, I might have missed this earlier on the call but maybe you could walk through kind of the lead time you need to ramp new capacity and once you add it, what's the typical benefit to gross margin as you digest that capacity and get efficiencies out of the existing stock?
Tim Harris - CEO
Why don't I take the first part, Kathy, and you can take the second part.
Well, so it's -- I'd have to say in terms of how long it takes.
It depends.
If you have to build a new building, it's 9 months to a year.
If you're ordering equipment to fill an existing building, it depends.
But I think you'd reasonably say 13 weeks probably, maybe 6 weeks, maybe 8 weeks if there's idle equipment capacity prior to when you actually start installing and qualifying the lines.
In our case, from where we are now though, we could do it more quickly, should the customers have a need because as we say we're really - we stopped our capacity expansion and we stopped spending money and we stopped adding resources.
But it's at a point where we can relatively quickly turn that on.
So, for us it's certainly within the quarter, up to a certain point and then it would be longer lead time again.
Did that answer the question you were asking?
Amit Kapur - Analyst
Yes, yes that's exactly it.
And then in terms of some of the gross margin deficiencies you can squeeze out?
Kathy Bayles - SVP & CFO
I think it's dependent upon ramping the capacity.
I mean, what Tim was talking -- I think what Tim was talking to is -- about is if we've slowed our capacity expansion so we have some equipment that's pretty available and we could bring up fairly quickly and relative to it contributing.
I mean if you get a full quarter's worth, then it's going to contribute like any other line of equipment.
Amit Kapur - Analyst
Okay.
Great.
Thanks.
Operator
Moving on, we will hear from Christian Schwab with Craig-Hallum Capital Group.
Christian Schwab - Analyst
Great.
Thank you.
Solid quarter.
Of the $91 million with Seagate - we had enterprise.
How much of that revenue was for end of life Maxtor programs?
We had $1.1 million enterprise.
They probably bought a little more desktop, maybe not.
Can you quantify that?
Ray Martin - EVP, Customer Sales & Service
In terms of percentage, it's probably like 10% of the Seagate total volume.
Christian Schwab - Analyst
Okay.
And that's the revenue that goes away next quarter.
Correct?
Ray Martin - EVP, Customer Sales & Service
Yes.
Well, it goes away under the Maxtor products, but from a Seagate's point of view it's not necessarily goes away.
Christian Schwab - Analyst
Right.
They may produce those products a little bit more.
Ray Martin - EVP, Customer Sales & Service
They're phasing those products out and of course, that's our enterprise products that are going away.
Tim Harris - CEO
Yes, Christian, -- Tim, again.
I would note that in Q1, Q2, Q3 was a really a successful transition and a sign of how close we work with our customers to be able to transition really out of the Maxtor into the essentially 100% Seagate mix, with doing more volume for Seagate in Q3 than Q2.
So that was a huge amount of work, certainly not just for us, but really tremendous support from the customer that made that happen.
And of course we spent really significant time and money to pull that off.
So, I think had it not worked that way, of course it would have been a very dismal situation; but in fact, we were very successful at transitioning the Maxtor demand to Seagate products.
Christian Schwab - Analyst
Right.
Right.
Tim Harris - CEO
We really feel good about it.
Christian Schwab - Analyst
Great.
And then on the $100 million in CapEx.
Should we assume that $100 million to support 40 million plus or minus capacity, that's the maintenance cost?
Tim Harris - CEO
Yes.
That would be generally true and for the combination of maintenance and of course the investment in upgrading PMR equipment, that's necessary.
There'll be some glass spending as well, but that's in the right range.
Christian Schwab - Analyst
Right.
And then, as we move to PMR, I guess I'm slightly confused.
As we move to PMR and of course that's a huge Seagate initiative that they talked about yesterday, because otherwise they're not going to be able to lower costs.
They're going to have to take platters out of drives to hit the gross margin targets.
Do you believe that there won't be any disruption in platter demand to unit demand?
Because it seems that your guidance doesn't see it that way.
It kind of anticipates that there could be a potential disruption and a reduction of platter count verses unit demand, given the fact that you don't plan on any more capacity next year in addition to the fact that you're adding a big new customer with almost 9% market share.
Tim Harris - CEO
Right.
Well, I think - we don't have the 2007 plan nailed.
We'll add capacity as we have to.
I don't think that in general the cost savings from PMR will be related to taking off platters.
The first order effect is that the drive yield, when the assembled drive, the drive yield will go up substantially, because frankly, the LMR technology people have worked for a long time and it's pretty stressed and the PMR, you just have more margin.
And so there's real, real measurable and significant money available in terms of improved yields.
One other thing is that the whole desktop is already, it's one platter per drive.
You know that's not going to go down.
The high capacity consumer electronics end, it tends to be multi-disk, and that's where we're really benefiting where the consumer is really asking for more and more demand.
If you look at the sweet spot, it's gone from under 200 to 250 to 500 to I think this debated, is the next spot really 750 or 1000, but it's a gig or terabyte but basically what we've been seeing and what we expect to see next year again is that demand for the capacity is going up at about the same rate for the increase in aerial density.
Christian Schwab - Analyst
Great.
Then I guess I don't understand why you wouldn't be more enthusiastic about adding capacity next year.
Tim Harris - CEO
Well, we don't have to be, really.
We'll add it when we need it.
I think it's prudent and conservative to plan on the year having a normal seasonality.
And normally the first half is down substantially or down at least somewhat from the second half.
If in fact it's not down, that's great.
We'll figure out how to meet the demand.
If it is down, we're prepared and I think we'll have good results either way.
Christian Schwab - Analyst
Right.
You'll be able to still maintain a fairly high capacity utilization in the first half of the year?
Tim Harris - CEO
Yes, yes exactly.
It's -- we're awfully good at adding capacity to meet customer demand.
I know we know how to do that.
Once you put a bunch of capital expense in place, it's there, right.
So I think it's the prudent thing to do, the conservative thing to do.
Plan for a slow first half, but have backup plans to respond quickly, should it be better.
That's the way we're going to approach it.
Christian Schwab - Analyst
Sure, and then on the ASP erosion.
The first time we've seen ASP erosion of 1.5% really since we began to add capacity.
Obviously, we had a very tight supply/demand.
Obviously it's not that or as tight anymore, especially if we're removing from air to ocean shipment.
Are you pretty confident that we don't return to the historic 1% to 2% quarterly price erosion?
I understand the enterprise portion of the argument, but that decreased pretty significantly last quarter when ASPs went up slightly.
In our higher capacity platters of 120 and greater, on an absolute number basis, actually grew 28% sequentially.
So, I wonder if I'm missing something there.
Tim Harris - CEO
Yes, no, great.
Thanks for asking the question.
First of all, the surface ship is basically NPP and not media.
Since the growth of nickel plated polish our substrate capacity is generally separate from media.
Christian Schwab - Analyst
Okay.
Tim Harris - CEO
And it makes a lot of sense - It costs a couple cents per disk if you air ship it, up to $0.06 depending on where you ship it to as compared to surface ship which is under $0.01.
So, in a time when your customers kind of desperate for every penny, that's again a prudent thing to do.
And we have increased aluminum capacity substantially and [inaudible] is really, really proud of those operations.
So on ASP though, the key -- let me give you the answer and then how I get there.
So in 2007, we actually expect the ASP to go up and that's really driven by a richer mix of PMR in 160 gig products.
Now, there's always price pressure in our industry and there's price pressure in both the drive guys and component guys.
Komag's not exempt from those market conditions.
And I do think there was additional price pressure in Q3 and we're going to see that again in Q4.
And there's greater price pressure, frankly, on older products that are approaching end-of-life.
I think though it's really useful if you look back in history, and if you do that you see -- in fact we have a chart on our website, you probably have seen it -- but if you look at the pricing changes over time, in periods of especially intense pressure, you could get a reduction of up to 5% a quarter and that's almost always followed by a recovery as older products get replaced.
And that's really the cycle we're in now where 80 gig products are dropping off and being replaced by 160 LMR or by PMR, depending on the customer and we just really expect 2007 to be really strong as the customers will really be just very far along that transition.
It will be much more 150 [sic 160] and much more PMR products.
So for us, a richer mix in 2007.
Christian Schwab - Analyst
Fabulous.
Thank you.
Tim Harris - CEO
No, thank you.
Operator
And our next question comes from Robert [inaudible] of Bear Stearns.
Robert - Analyst
Hi.
Most of the questions have been answered.
I just got one question.
Can you tell us if you keep track of it, what the industry and media capacity utilization rate is?
Do you have any kind of way you do that?
I'm just curious.
Tim Harris - CEO
That isn't something we have a number on.
It'd be a nice number to have.
I think we'd probably all like it.
One thing I would say is that
Robert - Analyst
Well, can I ask you what is your operating rate?
Or is it always 100, or what?
Tim Harris - CEO
We operated at 95% last quarter.
We've been running at 100% or more than a 100% in all of the previous quarters.
For us, 95% was a big slow down.
Robert - Analyst
All right.
Tim Harris - CEO
Just one comment on that.
It is not any of the supplier's advantage to have excess media.
And I think that Komag has certainly slowed down our expansion and all the signs that we see is that other suppliers are doing that as well.
So, we'll have to see how that balances.
If I were to guess, I would say overall, the market operates at greater than 90% utilization.
I think we're probably in the high end, between 95% to 100%.
But overall it's quite high.
Robert - Analyst
All right.
Well, I thank you for answering my question.
Tim Harris - CEO
Pleasure.
Robert - Analyst
Bye.
Operator
Our next question comes from Dan Renouard with Robert Baird.
Dan Renouard - Analyst
Hi.
Thanks.
I appreciate all of your clarity on a lot of these modeling issues, but I just have one follow up on that and then also a question on use of cash.
Just on the modeling, Kathy, how should we be thinking about normalized gross margin as we exit, as we get into this quarter and then next year?
Should we expect it to kind of trend up from here?
It sounds like that's basically what you're saying.
Kathy Bayles - SVP & CFO
Well, I think the -- what we said -- our target model we've always said, is upper 20s, as long as we are running relatively high utilization above 90% kind of range.
For Q4, I think we expect to have higher utilization, but with the pricing pressure gross margin would be similar to up a little bit.
On an on-going basis, again we haven't really changed our target model.
That's about all I can say.
Dan Renouard - Analyst
That's fair.
And then if you could, just use of cash - you've outlined CapEx coming down next year and you guys have right now a fair amount of cash on your balance sheet and next year presumably will be a decent cash flow generating year.
Is stock buyback something you're contemplating?
Or are you happy to just accumulate cash?
Kathy Bayles - SVP & CFO
Well, I think that's something we discuss all the time with the Board.
Since we've been in the period of using a lot of our cash generated from operations as well as customer advances to fund our CapEx, that's really been our focus.
So, as CapEx starts coming down and the trend, cash starts increasing, then we'll look at that more seriously.
Dan Renouard - Analyst
Okay, thanks.
Tim Harris - CEO
We've got time for probably one more quick question.
Operator
And that question comes from Sherri Scribner with Deutsche Bank.
Sherri Scribner - Analyst
Hi.
Thanks.
Just under the line there.
Tim Harris - CEO
Way to go!
Sherri Scribner.
I know.
Can you give us any sense of what percentage of your units were PMR this quarter?
Tim Harris - CEO
In Q3 it was very low.
In Q4 it becomes a material quantity.
Sherri Scribner - Analyst
Okay.
And then in terms of the plans to do glass.
Is that something you're thinking about shipments starting sometime in mid 2007 for a product like that?
And also, I assume that you're not going to be doing the substrates for that.
Do you see substrates for glass being easier to obtain in 2007?
Do you have plans with suppliers in place to have glass substrates?
What are your plans there?
Tim Harris - CEO
Good question.
We'll try to click them all off.
Yes, we definitely see improved availability on glass substrates.
It's dramatically different than it was in the past.
And frankly, the glass substrate suppliers seem to be anxious to work with us.
I think because of our strength and aluminum.
In fact, we will certainly start with buying glass substrates.
We will not start with polishing it ourselves.
We'll look at availability, price and quality over the long run to determine that; but certainly, for the short term we absolutely want to -- will buy substrates and not polish them ourselves.
When?
Yes, I think certainly in the first half, our customers are pulling hard for that.
They'd like us to be even faster, but I think the first half is a reasonable assumption.
Ray Martin - EVP, Customer Sales & Service
Sherri, this is Ray.
We're not exempt, unfortunately, from going through the customer qualification.
And so with -- some of the length of time of those qualifications will determine exactly when we start shipping.
But as Tim said, the pull is very strong and so I think we're going to get accelerated quals on a number of programs.
Sherri Scribner - Analyst
Okay, so you're in qualifications now for the lab?
Tim Harris - CEO
No.
Ray Martin - EVP, Customer Sales & Service
No, we have programs targeted and we're starting to build samples for those products.
Sherri Scribner - Analyst
So, maybe qualifications wouldn't start until the beginning of 2007?
Ray Martin - EVP, Customer Sales & Service
Yes.
I think factory qualifications, in fact, won't even start until toward the end of Q1.
Sherri Scribner - Analyst
Okay, thank you.
That's helpful.
Tim Harris - CEO
Beautiful.
Operator
And that does conclude today's question and answer session.
At this time, I'll turn the call back over to our host for any additional or closing remarks.
Tim Harris - CEO
Thank you all for joining us on our call today.
We look forward to speaking with you again next quarter.
Again, thanks, and goodbye.
Operator
Once again, this does conclude today's conference call.
Thank you for joining us and have a great day.