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Cabot Microelectronics Corporation (NASDAQ:CCMP)

F4Q08 (Qtr End 09/30/08) Earnings Call Transcript

October 23, 2008, 10:00 am ET

Executives

Amy Ford – Director, IR

Bill Noglows – Chairman, President and CEO

Bill Johnson – VP and CFO

Analysts

Suresh Balaraman – Think Equity Partners

Steve O'Rourke – Deutsche Bank Securities

Dmitry Silversteyn – Longbow Research

Jenny Yun – JP Morgan

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Cabot Microelectronics earnings conference call. My name is Stacy, and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference (Operator instructions) I would now like to turn the presentation over to your host for today’s call Ms. Amy Ford, Director of Investor Relations. Please proceed.

Amy Ford

Good morning. With me today are Bill Noglows, Chairman and CEO, and Bill Johnson, Chief Financial Officer. This morning we reported results for our fourth quarter and full fiscal year 2008, which ended September 30. A copy of our press release is available on the Investor Relations section of our Web site cabotcmp.com or by calling our Investor Relations office at 630-499-2600. Today’s conference call is being recorded and will be archived for four weeks on our Web site. The script of this morning’s formal comments will also be available there.

Please remember that our discussions today may include forward-looking statements that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These risk factors are discussed in our SEC filings including our report filed on Form 10-Q for the third quarter of fiscal 2008 ended June 30, and Form 10-K for the fiscal year ended September 30, 2007. We assume no obligation to update any of this forward-looking information.

I will now turn the call over to Bill Noglows.

Bill Noglows

Thanks Amy. Good morning everyone, and thanks for joining us. We are pleased with our performance in fiscal 2008 having achieved 11% revenue growth and 15% EPS growth.

Over the course of the year, we also made steady progress in our strategic initiatives and achieved significant milestones in each of our business areas. As an example, we made inroads with our slurries for barrier and advanced dielectric applications while sales of our slurry for tungsten applications grew an impressive 19% this year. In addition, the hard work, dedication and persistence of our pads team resulted in over $15 million of pad revenue this year signifying a breakout year for this growth business, which is highly complementary to our CMP slurry business. Last, we are leveraging our expertise for our CMP consumables business to continue to make headway in new ESF applications which are gaining traction and contributed to overall company performance this year.

We are very proud of our strong results and the significant progress we made towards strengthening our company in fiscal 2008 and we believe we are well positioned for what lies ahead. While we recognize that the macroeconomic environment and the semiconductor industry specifically are expected to be soft in the near term, we are experienced with and accustomed to successfully navigating through soft cyclical demand environments. For example, we have weathered three semiconductor industry downturns since becoming a public company in 2000 and during each of these down cycles we continued to generate positive cash flow from operations, we are profitable and continue to invest in our future. In our view, challenging times like these weed out the marginal players from the strong ones and create opportunities for the stronger companies to strengthen and grow while others might be struggling to survive. We are confident that our significant infrastructure and scale associated with our leadership position in CMP slurries combined with our low capital intensity and solid balance sheet make us one of the stronger players in our industry.

Recent press and analysts’ report that forecasted protracted semiconductor industry softness do impart to the current economic situation and the overall decrease in consumer confidence. Certain analysts have predicted the worst wafer start environment since 2001, a year in which the semiconductor industry contracted by more than 30%. Not only are the foundries expected to reduce their utilization rates by 20% to 30%, a number of memory manufacturers have announced that they have begun reducing production as well. This is uncharacteristic of the memory segment which is known for running its fabs at full utilization in order to drive down unit cost. Since the primary driver of revenue for our CMP consumables business is wafer starts, the downturn that we are now experiencing is expected to adversely affect our company in the near term. However, we expect any impact on our company will be partially offset by continued new wins in pads as well as other growth opportunities such as ESF and slurry products for advanced dielectric and barrier applications.

In our business, we began to see a reduction in demand for our CMP consumables products in August and based on industry forecast, we expect this softening of demand to persist well into calendar 2009. It is somewhat ironic that a soft industry environment sometimes presents more opportunities for customer engagement and growth. As our customers lower their utilization rates, they have more engineering resources and available tool time to evaluate and qualify new CMP slurry and pad products. We believe that over the past several years we have made the necessary investments in technology leadership and continued strengthening our customer relationships which has positioned us well for capturing evaluation opportunities that may arise during a downturn.

Although we believe that current economic situation has begun to negatively impact orders for our CMP consumables products, it has not impaired our ability to run our operations. We have over $220 million in cash, an untapped $80 million credit facility and no debt. In addition, we have a solid track record of generating strong cash flow. For example, during fiscal 2008, we generated over $70 million of cash from operating activities but used less than $20 million for capital additions. The current environment has not changed our company’s strategy and we feel we are well positioned to emerge from this industry downturn even stronger. Having said this, we will continue to be disciplined with our uses of cash and are placing increased attention on managing costs.

During the year, we continued our emphasis on technology leadership which has led to increased revenue from a variety of new innovative products. These products are targeted to achieve high performance while providing a low cost of ownership for our customers. Evidence of our success in this area can be seen in our new product vitality metric which measures the portion of our sales that are driven by products commercialized within the last three years. This metric has increased by more than 50% from last year and has more than doubled over the last three years. Historically, our CMP products have enjoyed long life cycles. In fact, some of our high-quality branded products that we introduced in the last 1990s are still in use today and we work to keep them vibrant by continually improving them to meet the ever increasing performance requirements of our customers. By achieving new product wins today, we aim to secure a solid revenue stream far into the future.

Executing on our operations excellence initiative has also contributed to our strong financial performance. Our continued high level of product quality and consistency is a key competitive advantage and has led to our achievement of a number of supplier awards during the fiscal year just completed. Furthermore, our strong focus on cost control in our manufacturing operations has earned us a 5% productivity improvement in fiscal 2008 which builds on the 18% cumulative productivity gains over the prior three years. Excluding the adverse effect on our overall gross profit margin of our emerging pads operations, this year’s productivity achievement when combined with continued pricing discipline resulted in our second sequential year of gross profit margin improvement.

One reason we are able to earn an attractive gross profit margin is the value we bring to our customers in terms of service and support through connecting with our customers initiative. This past year we improved our ability to collaborate more effectively with our Asia Pacific customers by expanding our technology centre in Japan to include a state-of-the-art 300 mm polishing tool and related metrology. In addition we are working towards strengthening our relationships with IBM and other strategic customers by working on various joint development programs. As we enter fiscal 2009, we expect to take advantage of the new opportunities that may arise to strengthen our customer relationships and win more business. We also plan to continue our disciplined focus on managing operating expenses while maintaining our world-class customer service and technical support.

I would not like to turn to our pads business. In fiscal 2008, our pads business grew to $15 million in revenue from less than $1 million in fiscal 2007. In addition, we nearly doubled our pad customer base finishing the year with 15 customers for over 20 distinct polishing applications and tens of thousands of pads sold. I am pleased with the progress we have made in tuning and optimizing our pad production process which combined with higher sales volume resulted in our second sequential quarter of positive gross profit for our pads business. We believe that the growth opportunity is significant in our pads business and that we have demonstrated that a win with one customer application has the potential to rapidly translate into multiple application wins. For example, about a year ago, we discussed an important win and a leading-edge customer supplied 300 mm pads for a 65 nanometer copper process. Last quarter we reported that this customer had back-integrated our pads into its older 90 nanometer and 130 nanometer copper processes. We are pleased that this same customer has now begun to utilize our pads for certain tungsten processes. Given the significant demand from this customer, we have entered into an agreement to establish onsite finishing capability at one of its wafer fabrication facilities. Construction began this quarter and is expected to be completed in the first calendar quarter of 2009. This type of customer engagement exemplifies the confidence we are building with our customers for our pad offering and for our operations excellence initiatives.

Turning now to our engineered surface finishes business, we remain optimistic about the potential in this area despite the lower revenue this year. In fiscal 2008, our QED business strategy focused more on expanding its customer base and increasing sales of standard machines and less on custom machines and research and development contracts. QED was successful at increasing its standard machine sales by more than 20% this year even in this challenging capital equipment market but it was not enough to offset a reduction in revenue from custom machines and research and development contracts. As we enter into fiscal 2009, we intend to continue our focus on standard machine orders which we believe is the foundation of sustainable long-term growth.

In summary, we believe the continued execution of our two-pronged growth strategy and related key initiatives were instrumental in driving our strong performance in fiscal 2008 and we remain committed to the implementation of this strategy. From our perspective, our unit based business, strong balance sheet and history of solid cash flow and earnings generation throughout industry cycles makes us well positioned for solid performance even during periods of industry softness.

With that I will turn the call over to Bill Johnson. Bill?

Bill Johnson

Thanks Bill and good morning everyone. Our revenue for the fourth quarter of fiscal 2008 was $90.2 million which was essentially even with the fourth quarter of fiscal 2007 and down 7.1% from the previous quarter. Quarterly revenue declined sequentially in all major business areas except sales of polishing pads. During the quarter we started to experience reduced demand for our CMP consumables products which we believe reflects the industry softening Bill referred to earlier. Total revenue for the full fiscal year was $375.1 million which represents a 10.9% increase from last year. Revenue for our core CMP consumable products for semiconductor applications increased by 14.7% while revenue for our data storage and ESF businesses declined.

Drilling down into revenue by business area, tungsten slurries contributed 41% of total quarterly revenue with revenue up 5.9% from the same quarter a year ago and down 5.4% sequentially. For the full year, tungsten slurry revenue increased by 19% driven by strong demand from our memory customers especially in Korea where our annual sales were up nearly 50% from last year.

Sales of copper slurries represented 13.9% of our total revenue and decreased 25.1% from the same quarter last year and 13.2% sequentially. For the full year, copper slurry revenue decreased by 9.5% reflecting the loss of some copper slurry business from one particular customer which we previously discussed during our second quarter earnings call. While sales of copper slurries were bulk and soft landing removal decreased in fiscal 2008, sales of copper slurries for barrier removal increased by more than 45% from last year.

Dielectric slurries provided 31.8% of revenue this quarter with sales down 1.8% from the same quarter a year ago and down 7.5% sequentially. For the full year, dielectric slurry revenue increased by 9.6%. Included in these businesses is rapidly growing advanced dielectrics product line the revenue from which was up more than 125% from last year.

Data storage products represented 3.2% of our quarterly revenue; this revenue was down 43.2% from the same quarter last year and down 2.9% sequentially. For the full year, revenue for data storage products decreased by 23.8%. This decrease was due in part to the merger of two significant players in the data storage industry as well as a loss of some business. However we recently won an important new position which we began ramping at the end of our fourth fiscal quarter.

Sales of polishing pads represented 6.1% of our total revenue for the quarter and increased 21% sequentially. For the full year, revenue increased nearly $15 million. During the quarter a significant customer completed its ramp of our product for its copper applications which was an important contributor to our strong revenue growth in fiscal 2008.

Finally, revenue from our ESF business which includes QED generated 4% of our total sales and our ESF revenue was down 14.3% from the same quarter last year and down 28.2% sequentially. Remember that our QED business is mainly capital equipment oriented, so quarter-to-quarter revenue fluctuations are common and capital equipment spending was down this year in general. For the full year, ESF revenue decreased by 12.3% driven by lower custom machine orders and research and development contracts in QED.

As a percentage of revenue our gross profit was 46.6% this quarter which was down from 49.1% in the same quarter last year and 46.8% in the previous quarter. Compared to the same quarter a year ago, our gross profit percentage decreased due to the effect of foreign exchange rate changes, increased logistics cost associated with higher energy prices and higher fixed costs related to our pads business. These effects were partially offset by a higher valued product mix. Compared to the previous quarter the slight gross profit percentage decrease was mainly due to a lower value product mix and higher logistics cost which were partially offset by lower manufacturing costs. For the full year, gross profit as a percentage of revenue was 46.5%, which was down from 47.3% in fiscal 2007. The decrease was primarily attributable to higher fixed manufacturing costs and lower manufacturing yields associated with our polishing pads business that we have discussed throughout the year. Also contributing to the decrease was the effect of foreign exchange rate changes. As Bill mentioned earlier, excluding the impact of our emerging pads business, gross profit percentage would have been slightly higher in fiscal 2008 than in fiscal 2007.

Now I will turn to operating expenses which include research development and technical, selling and marketing, and general and administrative costs. Operating expenses of $31.7 million this quarter were higher than the $30.3 million reported in the year ago quarter primarily due to increased expenses for clean room materials and higher professional fees including legal fees related to intellectual property enforcement. Compared to the prior quarter, operating expenses were $800.000 lower mostly due to decreased travel expenses and professional fees. The decline in professional fees was primarily driven by lower cost to enforce our intellectual property but was partially offset by higher professional fees in our corporate development area. For the full year, operating expenses of $125 million were 9.5% higher than fiscal 2007; nearly half of this increase was driven by costs related to our intellectual property enforcement. In addition, higher staffing related cost and travel expenses were partially offset by lower clean room materials cost.

Diluted earnings per share were $0.36 this quarter down from $0.43 recorded in both the fourth quarter of fiscal 2007 and last quarter. Diluted EPS for the full year was $1.64 which is up 15.3% from $1.42 reported in fiscal 2007.

Turning now to cash and balance sheet related items, capital additions for the quarter were $2.6 million bringing our full year capital additions to $19.2 million. This includes costs associated with the addition of 300 mm polishing and metrology capability to our Asia Pacific technology centre as well as the expansion of our pad manufacturing capacity. Depreciation and amortization expense was $6.3 million in the fourth quarter and share based compensation expense was $3.7 million. In addition we repurchased $5 million of our stock during the quarter bringing our total share repurchases to $39 million in fiscal 2008. For the full year, cash flow from operations was $70.8 million, a record for the company. We ended the fiscal year with $226.4 million in cash and short-term investments, which is $13.9 million higher than last year. We believe that our strong cash flow and solid balance sheet position us well for continued success through industry cycles and will allow us to capitalize on certain M&A opportunities that may arise in the future.

I will conclude my remarks with a few comments on our general outlook. Examining order patterns during the three months of the fourth fiscal quarter, we began to see a softening in demand for our CMP consumables products in August. As we observe orders for our CMP consumables products received to date in October that we expect to ship by the end of the month, we see October results trending significantly lower than August and September levels. However I would caution as I always do that several weeks of CMP related orders out of a quarter represent only a limited window on four quarter results. As we have discussed in the past, we believe that our CMP consumables business for the semiconductor industry is driven by overall wafer starts. Based on recent public announcements from several players in the semiconductor space regarding production levels, we expect fiscal 2009 to be a challenging year for our company from a demand perspective.

Despite the expected challenging demand environment and given the limited capital intensity, and relatively low fixed cost associated with our core CMP consumables business, our gross profit percentage guidance for fiscal 2009 remains unchanged at 46% to 48% of revenue. This guidance is for the full fiscal year and quarter to quarter our gross profit percentage may be above or below this range. Current uncertainty in economic conditions makes it particularly difficult to predict full-year results and makes it more likely that actual results could differ from expectations. From an operating expense standpoint, we continue to manage cost especially given the anticipated soft demand environment. For fiscal 2009 we expect our full-year operating expenses to be in the range of $120 million to $125 million which represents a flat to slightly lower outlook from fiscal 2008. Our full-year tax rate is expected to be approximately 32% compared to just over 30% in fiscal 2008. Capital spending should be around $13 million, a small portion of which is allocated to the construction of pad finishing capability at our customers’ facility which Bill discussed earlier. Depreciation and amortization for fiscal 2009 is expected to be approximately $22 million which is down from $26 million in fiscal 2008. Should any of these variables impacting our guidance change going forward, we will update the provided guidance accordingly.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Suresh Balaraman with Think Equity Partners. Please proceed.

Suresh Balaraman – Think Equity Partners

Thank you. Bill, regarding the pad, have you seen the significant slowdown that you are witnessing with slurries or are you still seeing adoption mostly overcoming the softness in the market?

Bill Noglows

No, we have continued to grow Suresh. We grew 21% in this fourth quarter that we just completed and as we continue to win customers, we continue to see growth in our pad business. Going into 2009, we would expect growth in our pads business to outpace wafer starts as we expect to win more business and ramp more customers. Just to caution us all, we have clearly demonstrated that it is very hard for us to predict when a customer will actually adopt and ramp our product, but as we continue to gain more customer wins we would expect to grow and grow disproportionately in the pad business. I guess the drag on us would be if wafer starts contact faster than we ramp new business, we could see a quarter-to-quarter decline in our pads revenue growth. We will have to watch that very carefully going into what we would describe as very uncertain times. But so far we have been able to grow every quarter since our early introduction in the first quarter of the fiscal year and we are delighted with the traction of the pad business Suresh.

Suresh Balaraman – Think Equity Partners

Is the softening completely correlated to the drop in utilization rates at chip makers or is the cutback more severe than the drop in wafer starts because some of them may be storing lower inventory of slurries in their factories?

Bill Noglows

What I think and what I read Suresh is every one of our customers has pulled in inventories and working hard to manage their working capital. When the foundries – we have described ourselves as, we have pointed people to the foundries as a good predictor about what our future might be or look like. The foundries are talking about a 20% to 30% utilization reduction in the fourth calendar quarter, I think that is real and I think that will happen and we are kind of brazing ourselves for it.

Bill Johnson

But in terms of the supply chain, we think there is not a great deal of slurry inventory in the supply chain. You recall a number of years ago we sold in Taiwan through a distributor and now we sell direct. So the inventory in the supply chain is quite less than it was say a few years ago. So, we don’t think an inventory drawdown is a big part of the downturn we saw this quarter.

Suresh Balaraman – Think Equity Partners

Also did you guys talk about the ASP change sequentially?

Bill Johnson

It was modest. I think ASPs on average was down about half percent, so really not much to talk about. There was a combination of pricing effect, mixed effect and foreign exchange effect, so really not much activity from a pricing standpoint.

Suresh Balaraman – Think Equity Partners

Okay. Thanks guys.

Amy Ford

Thanks Suresh. We’ll take our next question please.

Operator

Your next question comes from the line of Steve O'Rourke with Deutsche Bank. Please proceed.

Steve O'Rourke – Deutsche Bank Securities

Thank you, good morning. Just a quick follow-up to the last question, how do you see ASPs trending going forward in this type of environment?

Bill Noglows

Steve in other words – I think we have seen, when we have described we have seen there is a bit of stability over the last certainly four to six quarters in ASPs, I think it is difficult to predict what pricing is going to do in the next two, or three or four quarters. I think we are entering an environment where in my prepared comments this morning I suggested that this is the time when the strong gets stronger and the marginal get marginalized and depending on how some of those marginal players behave in a downturn that could have an impact on some pricing in some parts of the world. So, we’ll just have to wait and see. We have talked about our renewed pricing discipline for certainly in August and for the last four to six quarters and we see the impact on that and our ASP is stabilizing over time. So, we would hope to continue with that same discipline in our business but we have to react to competitive situations around the world and we will react to competitive situations around the world.

Bill Johnson

This is Bill Johnson, just a couple of other comments. We are always subject to pricing pressure from customers, they want lower costs and the challenge for us, given all the technology and the investment in technology is to convince the customer that we can deliver them lower cost of ownership through means other than just lowering the price. We can do that to show yield improvement and things like that. We are particularly showing that I think on the pad side of the business but that is where the biggest leverage for our customers to reduce cost is in cost of ownership not necessarily pricing and that is the story we take to the customers.

Steve O'Rourke – Deutsche Bank Securities

In discussion with your memory customers, we have seen memory capacity idled or shut down any thoughts on quantifying how much has been shut down among your memory customers and kind of what their outlook is going over the next couple of quarters with respect to that?

Bill Noglows

I am not sure that we have that granular data Steve. I know that many of them have publicly stated that they are managing their businesses for profitability now and not necessarily in market share and so what we believe or what I believe is many of them are trying to manage capacity in such a way to drive up their pricing but they have been unsuccessful certainly this year and going into a slowdown, I think it is going to be a very difficult business environment for our memory customers.

Steve O'Rourke – Deutsche Bank Securities

Fair enough, thank you.

Amy Ford

Okay Steve. Can we move on to our next caller please?

Operator

Your next question comes from the line of Dmitry Silversteyn with Longbow Research. Please proceed.

Dmitry Silversteyn – Longbow Research

Good morning. Couple of questions, first of all, we are seeing your pad sales still grow pretty robustly sequentially but the pace in growth has been slowing down every quarter since you started reporting. Is that just a question of more difficult to grow on a larger revenue base or are you seeing some sort of a slowdown in the rate of adoption or perhaps the market has slowed down overall?

Bill Noglows

No, I think it is a combination of things. I think as the revenue grows, it gets difficult to turn on the kind of growth rates the kind of growth rates we saw, certainly Q1 and Q2 we grew 84%, if you were growing at 84% each quarter that would be astronomical growth rate. We are quite happy with the growth rate we saw going in Q3 and Q4 of 21% and we continue. You know the way we grow the business Dmitry is we win customers and we win applications to customers and they are sequential in nature and they tend to be sort of step changes in revenue as we go forward. As you know, there are big customers and there are little customers and so the little customers don’t have that much of an impact on the overall revenue and revenue growth but they are important as we grow the business and they give us confidence and they give the industry confidence in both our offering and our supply chain in the value we bring in, in this particular part of our business. So we would expect to continue to grow. I won’t make any procrastinations about how much we will grow QonQ going forward but I would hope to grow faster than wafer starts as we continue commercializing and grow revenue for our fab business.

Bill Johnson

Dmitry, one additional on that, as Bill said all customers aren’t created equal, there are big ones and smaller ones. And one of things we have talked about is a ramp of a 65 nanometer application that was then back-integrated to 90 and 130 and we have seen about the full extent of that ramp. So, going forward, that application would move with wafer starts and then significant growth beyond that is going to depend on additional customer adoptions and we are working with over 30 applications right now at various stages of evaluation and qualification, so strong pipeline.

Dmitry Silversteyn – Longbow Research

Okay, thank you Bill. Then a follow-up question, Rohm and Haas reported resulted yesterday in their CMP related business they saw pricing being down fairly significantly, is that part of their competitive response to your greater penetration of the pad market or are these two unrelated events, or I guess different way of asking it, have you seen the competitive response of Rohm and Haas due your penetration of the pad market?

Bill Noglows

We are certainly seeing competitive responses not just from Rohm and Haas but from other potential CMP pad competitors in the marketplace. Again we don’t feel like we are competing on price, we are competing on value and performance here. We clearly have demonstrated longer pad life from our pad offering, we continue to gather information and data from customers that they are seeing significantly lower defects which result in higher yields. So, I think what we have here is a performance gap or a performance differential that we are able to sell and we are able to capitalize and we will continue to do that. We are currently working on our next generation technology and we are going to do what CAD and Microelectronics have always done and get in the market and continue to be in the market with innovative new high-performance products. So, I don’t necessarily think about the pricing as much as the value we are selling and the performance at the pad Dimitry.

Dmitry Silversteyn – Longbow Research

Fair enough Bill. One final question if I may, share repurchases you talked about completing about $39 million worth of share repurchases in ’08, can you remind us how much you have left under your, I believe, it is $150 million authorization and then just I guess a strategic question, how come you were not a little bit more aggressive with share repurchases given the price of the stock and will you be more aggressive with share repurchases in fiscal ’09 given your cash position and the fact that you expect to remain free cash positive through this downturn?

Bill Johnson

Dimitry, we are actually working under a $75 million program right now and through the fourth quarter we had purchased $25 million under that program and have $50 million remaining. We did a total of $39 million for the full fiscal year. As we look at our share repurchase program in 2009, it is a sort of a balance of apparently attractive stock price given low valuations currently against sort of the uncertainty of what the future is going to be. I think you are hearing on all these calls that there is just no visibility as to what the business environment is going to be in 2009. So, I think that we are cautious to balance our current valuations with sort of an unknown environment going forward. But we have a very strong financial model. We generate quite a bit of cash because we are profitable and have limited capital intensity and I think it is that strong balance sheet that gives us quite a bit of confidence heading into a soft business environment, but we will report repurchases on a quarterly basis. I don’t think I could give you whole much more color on what the pace of those might be.

Dmitry Silversteyn – Longbow Research

So if I understand your answer correctly Bill, you think that given the cloudy outlook for 2009, there is a possibility that the current valuation may be revised downward depending on business conditions so you are not in a hurry to purchase shares at this price?

Bill Johnson

No what I am saying is the Stock will value our company and it does so every day. The market will do that and it is a balance between what do we want to use our cash for between several alternatives, the repurchase of stock, investment in our business, potential M&A activity that could become available given the soft environment. So, it is always balancing those things and that is how we have treated our share repurchase in the past and that is how I will treat it going forward.

Dmitry Silversteyn – Longbow Research

Okay, fair enough. Thank you.

Amy Ford

Thanks Dimitry. We’ll take one last caller please.

Operator

Your next question comes from the line of Jenny Yun [ph] with J P Morgan. Please proceed.

Jenny Yun – JP Morgan

Hi, good morning. Do you have a forecast of what your pads revenues to be in fiscal ’09?

Bill Noglows

We have internal goals and targets and objectives that we haven’t communicated or shared with outside and we won’t. I think that is the way to answer the question Jenny, we don’t give guidance but we have what we would describe as fairly aggressive targets inside the company from both pad revenue as well as yield improvement and cost reduction. We will see where we end up at the end of the year but at this point in time, we are certainly not going to put out guidance on revenue.

Bill Johnson

But having said that, it is the largest growth opportunity for the company. When we think about big growth opportunities aside from just changes in wafer starts, pads opportunity is probably first and then we also have interesting growth opportunities in the ESF business as well as some more specialized CMP slurry applications like advanced dielectrics and barrier. So, several growth opportunities for the company but pads is probably front and center.

Jenny Yun – JP Morgan

Okay, but from your qualitative I guess answers earlier, it sounds like you think it is at least directionally going to go up?

Bill Noglows

We would certainly hope it would go up and we expect it to go up. I think as Bill said, we were hoping in the early years as a company that we are able to sort of grow through downturns because of the rapid incorporation of CMP technology and offset the decreases that we are seeing from wafer start contraction. I think going forward we looked at things like that, Bill just talked about pads and advanced dielectrics and barrier, CMP slurries and some other areas our business is to partially or maybe totally offset any decline or retraction of wafer starts. So, the pads business is our single largest opportunity for growth, it is one where we think we have a significant offering that is clearly demonstrating its value in the marketplace. I just want to reinforce in my prepared comments is when I mentioned that we had come to an agreement with one of our customers to install an onsite grooving [ph] facility at the fab, we think this is just a terrific opportunity for our company. It gives us an opportunity to leverage cost with this particular customer and look for opportunities to reduce cost and things like packaging and quality and transportation. I think it is an indication of our technology and the flexibility of our technology where we can move these low cost somewhat modular grooving facilities into a customer slab and custom groove for those customers. So, we just think it is the next step in sort of the evolution of our pad business and just reconfirms the confidence that some of our customers have seen in our pad offering and their willingness to sort of commit at that kind of level. So, we see this as a very significant growth opportunity for our company.

Jenny Yun – JP Morgan

Okay. I think maybe you indicated in the past that your pads part would be corporate average gross margins once they reach a particular volume in production level?

Bill Noglows

That’s correct.

Jenny Yun – JP Morgan

Is it at that level now or you still have ways to go?

Bill Noglows

No, this was the sequential quarter we had of positive gross margin for our pads business and for the full fiscal year we were breakeven at that gross profit level. As we continue to win business and grow volume, we expect our gross margins to grow up and we would hope to start to approach the kind of gross margins that we enjoy in our CMP slurry business by roughly the end of this fiscal year and maybe beyond depending on our volume gross over the year.

Jenny Yun – JP Morgan

Okay great, that’s helpful. Thank you very much.

Amy Ford

Thank you Jenny and thank you for your time this morning and your interest in Cabot Microelectronics. We look forward to the next opportunity to speak with you. Good bye.

Operator

Thank you for your participation in today’s conference. This does conclude your presentation. You may now disconnect and have a great day.

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Source: Cabot Microelectronics Corporation F4Q08 (Qtr End 09/30/08) Earnings Call Transcript
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