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Cabot Microelectronics Corp. (NASDAQ:CCMP)

F2Q09 (Qtr End 3/31/09) Earnings Call

April 23, 2009 10:00 AM ET

Executives

Amy Ford - Director of Investor Relations

William P. Noglows - Chairman, President and Chief Executive Officer

William S. Johnson - Vice President and Chief Financial Officer

Analysts

Avinash Kant - D.A. Davidson & Co

Dmitry Silversteyn - Longbow Research

John Robert - Buckingham Research

Peter Kemp - Deutsche Bank

Operator

Good day, ladies and gentlemen and welcome to the Second Quarter 2009 Cabot Microelectronics Earnings Conference Call. My name is Eric, I'll be your audio coordinator for today.

At this time all participants are in a listen-only mode. We'll facilitate the question and answer session at the end of the presentation. (Operator Instructions)

I would now like turn your presentation over to 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 second quarter of fiscal year 2009, which ended March 31st.

Our announced results this morning follow our press release on April 14, in which we discussed certain preliminary results. Copies of these press releases are available on the Investor Relations section of our website, 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 website. 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 first quarter of fiscal 2009 ended December 31st, 2008 and Form 10-K for the fiscal year ended September 30th, 2008. We assume no obligation to update any of this forward-looking information.

I will now turn the call over to Bill Noglows.

William P. Noglows

Thanks Amy. Good morning everyone and thanks for joining us. This morning we announced financial results for our second quarter of fiscal 2009, which we believe reflect a continued effect of the global recession on our business.

We reported revenue of $45.4 million, which represented a more than 50% decline from the same quarter last year. As a result of the unprecedented low level of demand for our products, our gross profit percentage was adversely impacted by the significant under utilization of our manufacturing capacity during the quarter.

Additionally, we recorded several specific expense items totaling $3.6 million, which added to our operating expenses this quarter. As a result, we reported a net loss of $10.1 million for the quarter. However, even during this challenging period, we generated positive cash flow from operations during the second fiscal quarter and for the fiscal year-to-date.

In addition, we ended the quarter with a healthy cash balance of $159 million and no debt even after our cash purchase of EPOC material company in February for $66 million.

We believe the company's financial performance in the second fiscal quarter is consistent with the weak economic environment. However, we are encouraged by recent signs of an upturn in our business. Following the low revenue levels of January and February, we saw a marked increase in demand for our products in March and orders to date in April are tracking significantly higher than in the same period in March.

We are hopeful that this recent upturn may indicate that the worse is behind us and that we're seeing the startup of a recovery. Based on some industry reports, it appears that a major correction of excess semiconductor device inventory occurred over the past two quarters. With semiconductor inventory adjustments expected to be completed in the first half of calendar 2009, and assuming the traditional seasonal strength in demand in the second half of the year, some industry analysts expect IC device demand will accelerate in the second half of this calendar year.

Additionally, some more than 2 trillion in worldwide economic stimulus could prove to be a positive growth driver for the global economy over the next two years including the demand for electronics. There are already positive signs of increased demand in electronics stemming from China's adoption of 3G technology.

While we hope that the growth forecasted by some industry reports materializes in the near term, we know that limited visibility into the semiconductor industry and the global economy makes it too early to predict a recovery with any certainty. Given this lack of visibility, we continue to manage our business with the focus on cost management and cash flow.

In the December quarter, we implemented cost reduction initiatives to better align our costs with the declining demand for our products we began to experience at that time. For example, we implemented shorter work schedules in our production operations, a higher in fees and reduced discretionary spending.

In response to the continued industry downturn and the opportunity to realize synergies and leverage resources to our acquisition of EPOC, we implemented additional cost reduction measures during the second quarter, including a modest reduction in force.

Within the last two months, we saw demand for our products increase and we quickly increased work schedules in our manufacturing operations to meet demand. As a result of our focused cost reduction efforts and our ability to respond quickly to changing industry conditions, we achieved significant savings across our business in the second quarter without comprising our operations, quality or intellectual capital.

Despite the adverse economic and industry climate, our financial flexibility allows us to continue invest in our company and execute on our primary strategy of strengthening and growing our core CMP consumables business, while at the same time continuing our efforts to leverage our CMP technology into new applications and industries through our engineered surface finishes business.

Our recently completed acquisition of EPOC allows us to strengthen and grow our core CMP consumables business. As semiconductor technology becomes more complex and the cost of developing leading edge products and supporting our customer's increases, we believe the benefits of scale become more important.

The EPOC business adds to our scale particularly in Taiwan, the world's largest geographic market for CMP consumables and also expands our copper product portfolio.

Now that the transaction is closed, we are working to effectively integrate our two businesses and leverage the natural synergies. For example, we recently implemented a reorganization of our research and development function as part of our technology leadership initiative, design to capitalize our new capabilities and opportunities in Taiwan, and to better leverage the strengths within our overall R&D team.

Our EPOC acquisition also supports our key initiative of connecting with customers. We have been working towards shifting more of our business resources to the Asia-Pacific region to increase the proximity to our significant customer base there. By acquiring EPOC, a Taiwan based business, not only have we partnered with the company that has existing strong customer relationships, but we have also significantly increased our physical assets in this very important region.

Today, approximately 50% of our employees and fixed asset base is located in the Asia-Pacific region, but there is a significant increase from 5 years ago, when only 25% of our employees and fixed asset base were located in the region.

By positioning ourselves physically closer to our customers in the Asia-Pacific region, we expect to increase our ability to better serve and collaborate with them on a comparable level to our customers in the U.S.

We also aim to strengthen and grow our core CMP consumables business through internal development efforts. We believe our CMP pad business represents the company's strongest internal growth opportunity since pad represents a large adjacent business area to our core CMP slurry business.

By expanding our product portfolio into its adjacent area, we affectively increased our total addressable market by over 70%.We have steadily grown our pad customer base over the past two years across a wide range of polishing applications, technology notes and polishing tools, and we are pleased to report that we gained two new pad customers this quarter and one new application with an existing customer.

Additionally, we made significant progress in improving our pad manufacturing yields. Through operations excellence efforts, our pad team exceeded the targets we established last year and we are continuing to pursue additional yield improvements in fiscal 2009. We also completed the installation of our onsite pad finishing capability at TSMC and achieved ISO 9001 certification for this facility in our second fiscal quarter.

This pad capacity was installed on schedule and fully operational in less than six months. We believe this is an important milestone in our pad business potentially driving increased customer engagement and reducing logistics costs.

In summary, we remain confident in our long-term strength of our business despite the negative impact from the current economic downturn. Recall that we are primarily units-driven consumables company. So, our business is quick to respond to increase production of IC devices by our customers.

Unlike some other players in the industry, for us this downturn is not a question of survival, it is a question of prudently seeking and leveraging opportunities as well as executing on our strategies to further strengthen our business. We believe that our acquisition of EPOC and our installation onsite pad finishing capability at TSMC are excellent example of Cabot Microelectronics seizing opportunities were others might not have the ability to do so.

We are managing our business to optimize our performance during challenging industry and economic conditions. We believe that we have implemented in an appropriate level of focus cost management initiatives in response to the current conditions. However, should the industry downturn prove to be more protracted, we are prepared to further adjust our cost in infrastructure.

Overall, we hope that the recent upturn in our business continues and that we will benefit from improved economic and industry conditions as well as the addition of EPOC in the near future.

And with that I'll turn the call over to Bill Johnson. Bill?

William S. Johnson

Thanks, Bill and good morning everyone. Revenue for the second quarter of fiscal 2009 was $45.4 million, which was down by 52% from the second quarter of fiscal 2008 and down 28% from the previous quarter.

Our reported revenue was consistent with the preliminary revenue we've provided in our press release on April 14. We believe the decrease versus both previous periods reflects the impact of the global economic recession on electronics demand and inventory correction of excess semiconductor devices and traditional seasonal weakness.

Revenue for each of our business areas declined year-over-year and sequentially except revenue from our data-storage slurry products, which increased significantly from last quarter. Despite the sharp reduction in our revenue, the average selling price for our CMP slurries increased year-over-year and was even with the prior quarter.

Drilling down into revenue by business area, Tungsten Slurries contributed 42.1% of total quarterly revenue with revenue down 50.4% from the same quarter a year ago and down 26.7% sequentially. Sales of copper products represented 15.9% of our total revenue and decreased 45.5% from the same quarter last year and 18.6 % sequentially. Included in this business is our barrier removal product line, our barrier revenue decreased by 8.9% from the same quarter a year ago.

Dielectric slurries provided 25.2% of our revenue this quarter with sales down 61.7% from the same quarter a year ago and down 41.5% sequentially. Data storage products represented 7.4% of our quarterly revenue. This revenue was down 12.1% from the same quarter last year, and up 38.4% sequentially. The increase in revenue from the prior quarter was primarily driven by the ramp in demand from an important new customer win for this business that we mentioned last quarter.

Sales of polishing pads represented 5.4% of our total revenue for the quarter and decreased 24.9% from the same quarter last year and 28.8% sequentially.

Finally, revenue from our engineered surface finishes or ESF business, which includes QED, generated 3.9% of our total sales, and our ESF revenue was down 68.6% from the same quarter last year and down 32.1% sequentially. As primarily, an equipment-orientated business, our QED business is subject to capital equipment cycles, and that the current cycle has significantly adversely affected revenue in this area.

Our gross profit this quarter represented 28% of revenue, which is consistent with the preliminary results we discussed in our release of April 14th. The significantly lower gross profit percentage this quarter compared to 44.7% in the same quarter last year and 45.6% in the previous quarter primarily resulted from unprecedented under utilization of our manufacturing capacity.

We are accustom to operating in volatile demand environments and historically, our relatively low fixed manufacturing costs have allowed us the flexibility to quickly change production levels while maintaining a mid-40% gross profit margin range, such as we reported last quarter.

However, we have never experienced two back-to-back quarters of such significant revenue decline. And this was enough to materially impact our gross profit percentage for the quarter.

Fundamentally, our business model has not changed. As Bill mentioned earlier, we recently began to see an increase in demand and we are hopeful that the negative impact of the economic downturn will be relativity short-lived.

Year-to-date gross profit represents 38.2% of revenue. In light of our gross profit performance for the first half of the fiscal year, we no longer expect to achieve fiscal 2009 gross profit within our previous full year guidance range of 46% to 48% of revenue.

Now I will turn to operating expenses, which include research, development and technical, selling and marketing and general and administrative cost. Operating expenses of $30 million this quarter included the negative impact of three specific items. First, a $1.5 million write-off of in process research and development expenses related to our acquisition of EPOC, which is subject to finalization of purchase accounting; second, a $1.1 impairment related to certain research and development equipment; and third, a $1 million increase in our reserve for bad debt expense due to the impact of adverse economic conditions on customer collections including customer bankruptcy.

Excluding these specific items, operating expenses would have been $26.4 million in the second fiscal quarter. On this basis of comparison, this represents an 18.1% reduction from the $32.2 million reported in the same quarter a year ago, and a reduction of 10.3% from the $29.4 million reported in the prior quarter. Similarly, the decrease from both periods was primarily driven by lower staffing related cost, professional fees, including legal fees to enforce our intellectual property and travel expenses.

Reflecting the closing of our acquisition of EPOC this quarter as well as additional actions we took this fiscal year to improve our operating effectiveness and capitalize on acquisition related synergies, we now anticipate our fiscal 2009 operating expenses to be in the range of $115 million to $120 million including the three specific items I described earlier. This is down from full fiscal year 2008 operating expenses of $125 million, which was a period of time during which we did not own EPOC.

Diluted loss per share was $0.44 this quarter, down from earnings per share of $0.34 reported in the second quarter of fiscal 2008 and $0.01 last quarter primarily due to the significantly lower level of revenue and accompanying lower gross profit percentage, both driven by the global economic downturn.

The adverse specific operating expense items I described earlier accounted for approximately $0.10 of the diluted loss per share this quarter.

Turning now to cash and balance sheet related items, capital additions for the quarter were $2.3 million. Depreciation and amortization expense was 6.1 million and share-based compensation expense was 2.9 million. Reflecting our acquisition of the EPOC in February, we ended the quarter with a healthy cash balance of 159 million and no debt outstanding.

Despite reporting a net loss, we've generated positive cash flow from operations during the quarter and fiscal year-to-date. Due to our strong cash generating business model and solid balance sheet, we have the flexibility to continue to focus on strengthening our business during the current downturn, while other companies in our industry maybe struggling just to survive.

I will conclude my remarks with a few comments on our general outlook. As we have discussed, looking at our revenue pattern during the three months of the second fiscal quarter, we saw continued softening in demand for our CMP consumables products in January and February with revenue in each of these months of only $13 to $14 million.

However, in March, we experienced a marked increase in demand and re-recorded monthly revenue of $18.5 million, approximately 40% higher than in January and February.

As we observe our orders for our CMP consumables products received today in April that we expect to ship by the end of the month, we see April results trending significantly higher than in the same period in March.

We are encouraged by the recent uptake and demand for our products. 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 full quarter results.

Now, I'll 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 Avinash Kant with D.A. Davidson & Co. Please proceed.

Avinash Kant - D.A. Davidson & Co

Good morning. Just a few questions Bill, when you talk about things improving significantly in the month of April, do you mean another 40% kind of increase as you saw in the month of March?

William Johnson

I'd really not describe in terms of particular percentage increase, because it does represent such a limited early look at the quarter. But when we look at the first three weeks of orders, the month of April compared to March, the increase is significant. I don't think I want to characterize any further than that.

Avinash Kant - D.A. Davidson & Co

Okay. And in terms of the pad business of course you've been seen new customers and new business there. Of course, right now things have been tough but how do you see that coming along in the next year or two?

William Noglows

Well, I think in this period of -- that we've been living within last two quarters, our short pad team is being has a mist to be kind of sitting at all four cylinders, they have been working and executing on the plans we established two years ago, and they involve more customer qualifications, working on our productivity and yield improvements, developing and introducing a next generation pad technology and completing the build and the infrastructure build out at TSMC.

Those things have gone exceptionally well and many of which we've executed ahead of schedule. So, we continue to be bullish about our pad opportunity and our pad technology and the value we bring our customers and we think that we will continue to see the kind of growth we've seen earlier and that be prior to the downturn.

Again we are excited, clearly our pad and our pad technology has been validated in the market place. And we see more and more interest around the world to get our pad technology into pads and get them qualified.

William Johnson

Also Avinash, we -- today, are all of our sales and promotional effort is been around a single product the D100 product. We're working on our next generation pads. Over the time frame you described, we would expect a sampling introduction and commercialization and revenue from that next generation pad as well.

Avinash Kant - D.A. Davidson & Co

Perfect. Now on a broader business perspective, you have of course a significant exposure to foundries. At this point, from what you're hearing from them, what's the qualitative direction that they are showing at least in their planning stages in terms of the rest of the year if you were to qualitatively talk about how the quarters are looking, are they planning for a sequential up-tick all through the rest of the year?

William Noglows

Well, we've seen an up-tick. I was on the phone last night with our the gentlemen that runs our Taiwan operation and he told me he estimates that the large foundries are running at about 80% of capacity which is far better than they were a quarter ago at sort of 50%.

I think that we are being cautious. I think our customers are being cautious. We are all expecting and waiting to see what happens in the third calendar quarter, which is a traditional, very strong seasonal quarter for the semiconductor industry related to the back to school build and the pre-holiday build.

I think it's too early for us to sort of give you a forward view. We have is limited of visibility as many of customers, but we're more optimistic given the upturn in demand we've seen and certainly in March and then again this month in April. But I think it's very difficult for a company like ours to predict what's going to happen in the third and fourth, calendar quarter because I think it's difficult for many of our customers to predict what demand will be in light of the economic situation around the world.

Avinash Kant - D.A. Davidson & Co

Okay. And a few quick house-keeping. Could you give us the goodwill and other intangible number in your balance sheet?

William Johnson

I don't have that on the balance sheet. If you compare balance sheets quarter-to-quarter, you saw a big increase in other long-term assets. And most of that is increase is attributable to goodwill and intangible assets associated with the EPOC acquisition. I think the total there was around $45 million or so. In addition, there are some restricted cash in other assets that makes up most for the rest of that. We'll have more visibility on that when we issue the Q2.

Avinash Kant - D.A. Davidson & Co

So, the other asset lined that has gone up is primarily because of goodwill?

William Johnson

It's mainly related to purchase accounting on the EPOC acquisition, that's right.

Avinash Kant - D.A. Davidson & Co

That's why -- okay. I was hoping to get that number because that will help me figure out the tangible book for you but if you didn't have that, we can talk later about that.

William Johnson

The best number I have is around $44 million. That's the increase in tangible assets and goodwill related to EPOC.

Avinash Kant - D.A. Davidson & Co

Okay. So, 44 million is the increase in tangible and goodwill?

William Johnson

That's right.

Avinash Kant - D.A. Davidson & Co

Okay. Good. That's a good number. And it looks like all the charges you took mostly came from R&D, could you break that down, the 3.6 million into COGS, R&D and SG&A?

William Johnson

I can't. I can tell you though it's all operating expense. Let's see if the bad debt expense increase will hit administrative, the equipment write-off is R&D, and the in process research and development is R&D, but I think we sometimes show that in another line items, just not to confuse it with ongoing R&D efforts.

Avinash Kant - D.A. Davidson & Co

Right. Okay. So, the two line items that are in the R&D reflect the 1.5 and 1.1.

William Johnson

1.1, that's right.

Avinash Kant - D.A. Davidson & Co

That 1 million could go into?

William Johnson

G&A.

Avinash Kant - D.A. Davidson & Co

G&A, right. Okay. And what was the headcount at the end of the quarter?

William Johnson

Approximately 900 and that reflect the addition of the EPOC employees.

Q - Avinash Kant: Thanks so much, Bill. Thanks.

Amy Ford

Thanks, Avinash. We'll go ahead and take our next caller please.

Operator

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

Dmitry Silversteyn - Longbow Research

Good morning, guys. Couple of questions if I may. On the EPOC acquisition, I just want to revisit that for a second. You talked about acquiring a good asset structure in Taiwan and picking up some customers in the corporate slurry business.

Is that kind of what the driver for the acquisition was I mean there is nothing in terms of technology or a tool box that you've picked up from this that can somehow help you with your intellectual property or product development going forward, this was just a geographic acquisition if you will as well as a market share acquisition. Is that the right way of looking at it?

William Noglows

Yes and then some Dmitry, we consider the EPOC acquisition highly strategic. There is of our CMP competitors today, there are a handful of them we believe are really great suppliers so that a profitable company's was sustainable business model. So EPOC was one of them. We have been talking about extending our manufacturing capacity into South-East Asia for many sort of several years now, EPOC gave us an opportunity quickly establish a manufacturing an R&D footprint in Taiwan whereas as you know it's our -- its kind of the largest market we serve in the world today.

It may have some unique products that fill out our copper portfolio of products for copper CMP technology. They have some terrific people on the R&D side. They are very capable operating company, and they have some very strong relationships with customers in South-East Asia. So, it kind of covers all that, all the ground of our strategy around operations excellence technology leadership in getting closer to customers. It's just a great fit for our company.

Dmitry Silversteyn - Longbow Research

Excellent Bill. Thank you for the color. Last quarter, you talked about your SG&A expense being largely fixed, and then you proceeded to lower excluding EPOC by 6 million plus yield. So, kudos on that. My question is two fold, number one; is this level of expense sustainable longer-term beyond kind of like emergency actions that you are taking right now to try to husband some cash and reduce some cost? And secondly, can you remind us how -- what the variable versus fixed mix is in your cost of goods sold line?

William Johnson

First, with respect to operating expenses, as we've talked about our focus in managing costs, operating expense in this environment has been to try to manage around discretionary type expenses and not implement significant layoffs. And the idea being that we're not at all capital-intensive business, we're more intellectually-intensive business.

So, we've put together, a strong team of employees with experience and capabilities that are really important to business and will be important when the industry turns up. So, we focused on things like hiring fees, restrictions on travel, suspension of some employee benefits, reduced annual merit increase on employee's salaries and a limited production in force among some other things.

Some of those we would -- in an upturn, we would turn back on, certainly the suspension of some employee benefits, that's a temporary thing. The travel restrictions we have not restricted travel to customers and some of that may could be sustained, but it's always our plan to try to grow, limit the growth in operating expenses to a rate as significantly below the growth rate on revenue. And that would be our strategy going forward coming out of the downturn.

Dmitry Silversteyn - Longbow Research

Okay. Alright. Great.

William Johnson

With respect to the cost of goods sold, we have variable, semi-variable, semi-fixed and fixed cost and so I'm not really able to split that out in any detail. But I would call -- I'll just characterize our cost as sort of limited on the fixed cost, but I can't give you anymore specificity. I'm sorry.

Dmitry Silversteyn - Longbow Research

Okay. That's okay, Bill. You talked about lower legal fees as at least one of the drivers of year-over-year decline in operating expenses; can you give us an idea of kind of what the magnitude there is? Are we talking under a 100 million, over a million in terms of year-over-year difference in legal fees?

William Johnson

No, I wouldn't be able to be that specific there, but it was lower both year-over-year and sequentially. Our IP litigation continues and we'll see volatility in that depending upon how the case proceeds. But I couldn't give you a lot more color other than we try to call out sort of the significant items and that what was one of the items we called out.

Dmitry Silversteyn - Longbow Research

Okay. And I think last quarter -- this is my last quarter, I think last quarter, you mentioned that pad business was kind of breakeven on the gross margin line, given the 25% or so decline in performance, in volume of that business. Is it fair to assume that you lost some money on gross margin line in the pad business?

William Noglows

I think that's fair to assume given the downturn and demand for the pads, Dmitry.

Dmitry Silversteyn - Longbow Research

Okay. Would care to come on how much or what the gross margin would have been at next pad business I guess?

William Johnson

It had about a 3.5% drag on gross profit margin overall.

Dmitry Silversteyn - Longbow Research

Okay. That helps. Thank you guys

William Noglows

Thank you.

Amy Ford

Thank you, Dmitry. We'll take our next caller please.

Operator

Your next caller comes from the line of John Robert with Buckingham. Please proceed.

John Robert - Buckingham Research

Hi, good morning.

William Noglows

Good morning, John.

John Robert - Buckingham Research

Is it fair to say there is not much inventory cycle effect between you and the FABS given the switch to direct distribution in much of Asia couple of years ago or is some of this resurgence in demands possibly some inventory stocking?

William Noglows

I think it's fair to say that we are quicker to respond to customer demand than we were prior to our going direct in Taiwan. We still use some distributors in some locations around the world. But I think we have more visibility now into rapid pickup in demands than we had prior, when we had distributors between us and the customers, John.

I would say, I think clearly some of our customers are refilling their supply chains and we're trying to refill our supply chains as well and get the system back working again sort of that at status core level. I think the question for us all is what is the new normal and what is new status call.

As we said in our release, we're bringing our steps back in the operating side of our company, our plans in Japan, and here in North America are running pretty hard right now relative to where they were in January and February. So, we feel as we said in our prepared comments, we feel pretty excited about the pickup in demand in March and April and we'll see where it goes.

William Johnson

There is a little bit more data that might be helpful, John. One, indication of sort of the close linkage to our revenue and our customers operations and we've talked about this in the past. There is -- historically, quite a strong correlation between our revenue and the reported monthly revenue on UMC and TSMC.

And if you look at this, the last 4, or 5, or 6 months, I think we've really been quite closely correlated to those, which would indicate not much in the chain. The only place, where I think we see we still have distribution of any amount is in China and we do see some wider swings in revenue, periodic revenue there based on the inventory that might be held by the distributor.

John Robert - Buckingham Research

Secondly, the onsite pad finishing at TSMC is a pretty interesting model. Can you tell us I should know this, but I don't, as Roman Horse follows a similar model with their pads or they don't really require the finishing and customization that yours do?

William Noglows

Well, I can't really comment on Roman Horse John, I would comment that from our perspective and our view, we saw it as a terrific opportunity to reinforce our value proposition with that customer and give -- provide them the ability to do custom tailored grooving onsite in such a real time for those pads within that system.

We just think it's strategically, it's a great move for our company and it positions us really well in Taiwan and in the Taiwanese market. And it gives us -- hopefully, it will give us some enhanced ability to collaborate and look for opportunities to reduce cost within the supply chain and better serve that customer. So, we are really excited about that the opportunity to do this.

I don't think it's a model, where we made a decision or a judgment about a centralized grooving facility or satellite grooving facility. We saw an opportunity to partner with one of our largest customers and do something really unique in the supply chain and that's why we did it.

John Robert - Buckingham Research

Is there an opportunity to do something similar in tuning of the slurries as I mean you've already gone down this tunable slurry model, but it's still done centralized, I don't know whether the customer specific requirements will justify anything done locally?

William Noglows

Well clearly, some and acquisition like EPOC gives us the ability to do just that in Taiwan for our Taiwanese customers and some of our South-East Asian customers. They just give us another side and another piece of infrastructure to get closer to our customers and cause us to be more responsive and flexible in meeting the demands to those customers.

So, I think -- again, I think that EPOC acquisition is a fantastic opportunity for our company to put us in a position to be much more flexible and responsive to customer needs and much more proactive in meeting those demands going forward.

John Robert - Buckingham Research

Okay. Thank you.

Amy Ford

Thanks John. We'll go ahead and take our next caller please.

Operator

Next question comes from the line of Peter Kemp with Deutsche Bank. Please proceed.

Peter Kemp - Deutsche Bank

Hi, thanks for taking my question. I was wondering, would you specify how much contribution you got from the EPOC acquisition in this quarter?

William Johnson

We remember this quarter only included one month of revenue from the EPOC acquisition. I don't think this quarter is going to be a representative quarter and I'd rather not give any more color than that.

I think if you remember when we announced this transaction, we estimated the revenue to be about $28 million in 2008, and we would expect that kind of revenue on the normal basis going forward. Net of any incremental sort of value we get by combining our R&D and our product portfolio with their product portfolio, we help to grow this business and not just maintain it.

Peter Kemp - Deutsche Bank

Right.

William Johnson

So, that's the -- I think that's the best time we could provide, as what we provided when we announced the transaction.

William Noglows

And then you'd expect the EPOC business is subject to the same sort of industry conditions that we are. So, our sales are down significantly in fiscal year '09 due to the industry and they are seeing the similar occurrence.

Peter Kemp - Deutsche Bank

The EPOC contributions would all fall under the comp category though. Will that be accurate?

William Noglows

A - : Yes, that's correct.

Peter Kemp - Deutsche Bank

Okay.

William Johnson

Let me just clarify a little bit; they do have a little bit of revenue in a couple of other business areas that may have an impact on our ESF business. But really the vast majority of their sales, it would be on the copper area.

Peter Kemp - Deutsche Bank

Okay. I noticed that there was a distinct drop in the oxide revenue this quarter, I was wondering is that a reflection of some of the memory capacity, maybe not really buying back in the comparable rate as your other customer base?

William Johnson

We're a little stuck by that ourselves. Ordinarily, you'd Dielectrics and Tungsten to move someone intend them because they're both pretty heavily used in memory. And the downturn in Dielectrics was more pronounced. And we really can just attribute that to sort of product mix, customer mix and sort of the pattern of orders. We don't believe we have lost any share, we think its sort of some volatility in the environment.

Peter Kemp - Deutsche Bank

Okay. And lastly, I was wondering you talked earlier about how your customers are building up their supply chain. I was wondering if you have visibility into the amount of inventory that they would maintain for your slurries and whether or not that the recovery that you're seeing in April -- in March and April, what percentage of that might have been to replenish the inventory that they've depleted during the set down period?

William Noglows

Peter, I don't think we have an accurate view on how much of those increase demand is restocking and how much is actually driven by wafer starts and CMP passes. We'll have a better -- I think we'll have much more visibility when we talk to you next quarter.

Peter Kemp - Deutsche Bank

Great. Thank you.

William Johnson

The model is to be pretty responsive to customers. So, our view is they don't hold a lot of inventory that we tend to try to supply them in real time. And so, just as I mentioned in the answer to John Robert's question, we see a really pretty strong correlation to our monthly revenue and the reported monthly revenue at TSMC and UMC. And so that would imply not too much in the channel but it's really pretty highly correlated to their actual production with not a lot of inventory in the chain.

Peter Kemp - Deutsche Bank

Okay. Thank you.

Amy Ford

Thanks Peter. We have time for one last question please.

Operator

Your final question will be a follow-up question from the line of Dmitry Silversteyn with Longbow. Please proceed.

Dmitry Silversteyn - Longbow Research

: Hi, actually my number one question that I want to ask has been answered by the previous call but I just want to make sure I understand what the tax rate will be going forward if you can provide us any guidance on that, given that it's always difficult to forecast on tax rate with losses?

William Johnson

Yeah, and the tax rate this quarter was around 40%.

Dmitry Silversteyn - Longbow Research

Right.

William Johnson

As opposed to historical rates that's sort of 31% to 33%. The tax rate going forward will depend upon whether we're operating in a net income position or net loss position. I think the same things that reduced the tax rate during the net income environment actually increased the tax benefit in a loss position. So, I think we have to watch results going forward and the tax rate would be more apparent.

Dmitry Silversteyn - Longbow Research

Okay. But would it be fair to say that the close you are to breakeven, the closer you will be to kind of 30% to 35% rate, and if you are still losing money at the same clip you lost this quarter be closer to 40?

William Johnson

Yeah, around a breakeven, I think you might see some strange things happening in the tax rate. So, it'd be difficult to really draw any conclusion. I think its going be an area uncertainty until we see actual results going forward. Sorry, I can't be more specific on that.

Dmitry Silversteyn - Longbow Research

That's okay. Could I just ask you one question to follow-up on that, your tax rate depend on March onward on the geographic mix of revenues and that which another layer of uncertainty where your revenues are going to come from?

William Johnson

No, its not. We're pretty fully taxable and what we find are the two things that kind of -- had to reduce our effective income tax rate are tax exempt interest on our invested cash as well as research and experimentation tax credit but the geographic mix doesn't play that big of a part on our tax rate.

Dmitry Silversteyn - Longbow Research

Okay though thank you very much.

Amy Ford

Thanks Dmitry. 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 participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.

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Source: Cabot Microelectronics F2Q09 (Qtr End 3/31/09) Earnings Call Transcript

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