Cabot Microelectronics' CEO Discusses F3Q 2013 Results - Earnings Call Transcript

Jul.30.13 | About: Cabot Microelectronics (CCMP)

Cabot Microelectronics Corporation (NASDAQ:CCMP)

F3Q 2013 Results Earnings Call

July 30, 2013 10:00 AM ET

Executives

Trisha Tuntland - Manager of Investor Relations

Bill Noglows - Chairman and CEO

Bill Johnson - Executive Vice President and CFO

Analysts

Taryn Kuida - D.A. Davidson

Edwin Mok - Needham & Company

Chris Kapsch - Topeka Capital Markets

Jairam Nathan - Sidoti

Dmitry Silversteyn - Longbow Research

Operator

Good day, ladies and gentlemen. And welcome to the Third Quarter Fiscal 2013 Cabot Microelectronics Earnings Conference Call. My name is Matthew, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. And now, I would like to turn the call over to Ms. Trisha Tuntland, Manager of Investor Relations. Please proceed ma’am.

Trisha Tuntland

Good morning. With me today are Bill Noglows, Chairman and CEO; and Bill Johnson, Executive Vice President and CFO. This morning, we reported results for our third quarter of fiscal year 2013, which ended June 30th.

A copy of our earnings release is available in the Investor Relations section of our website, cabotcmp.com or by calling our Investor Relations office at 630-499-2600. A webcast of today’s conference call and the script of this morning’s formal comments will also be available on our website.

Please remember that our discussions today may include forward-looking statements that involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements.

These risk factors are discussed in our SEC filings, including our report filed on Form 10-K for the fiscal year ended September 30, 2012. 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, Trisha. Good morning, everyone, and thanks for joining us. This morning we announced strong financial results for our third fiscal quarter of 2013. During the quarter we achieved revenue of $110 million, gross profit margin of 49.7% of revenue and earnings per share of $0.65, all of which are significantly higher than last quarter’s results.

Following relatively soft semiconductor industry conditions during the first half of our fiscal year, we saw strengthening in demand in our core business during our third quarter, as well as growth in demand for QED products.

This strengthening couple with our continued success for execution of our long-term strategies and our proven ability to manage our business over a range of industry conditions contributed to our strong earnings performance this quarter. Bill Johnson will provide more detail on our financial performance later in the call.

Let me start this morning by providing some general comments on conditions within the semiconductor industry. As has been widely reported the industry continues to experience a significant shift in demand for semiconductor devices for personal computers to those for mobile internet devices, which we have seen over the last several years.

For example, during the period of 2009 through 2013, in industry report estimates the communications IC market will register a compound annual growth rate of 16%, compared to a compound annual growth rate of 3% for the computer IC market during the same period of time.

Demand for mobile devices is growing rapidly, but since these devices generally contain approximately half of the semiconductor content per devices that PCs contain, overall industry demand has been somewhat muted.

The differing demand patterns for IC devices for the PC industry versus the mobile market mean that portions of the semiconductor industry supply chain that’s serve the mobile market are enjoying rapid growth, but those that serve the PC market are not.

Since we serve the broad market and sell our products to essentially every semiconductor manufacturer in the world, our growth is more closely tracked overall semiconductor industry activity.

Industry report suggested inventory levels are generally normal across device categories with some accumulation of high-end ICs in preparation for specific product launches in the second half of the calendar year.

IC manufacturers continue to cautiously manage inventory in the supply chain. That being said the outlook of some of our strategic customers’ and industry analysts for the third calendar quarter calls for modest sequential growth.

Turning now to company related matters, I’m pleased to report our pads business achieved sequential revenue growth of 14% for the quarter. While customers continued to enjoy the longer pad life afforded by our technology which is key to our value proposition, customer demand has returned to levels we experience during the first fiscal quarter of this year.

Our pipeline of business opportunities remains healthy and we continue to partner with existing and new customers on product evaluations and qualifications. As a result of these collaborations, during the quarter we secure new business wins for both our D100 and D200 product platforms for both leading-edge and legacy barrier, and tungsten applications.

Turing to our ICs CMP slurry business, we achieved sequential revenue growth in all of our slurry business areas this quarter. During the quarter, we won new business across a range of applications including tungsten, dielectrics, barrier and Through-Silicon Via or TSV.

Customers continue to actively sample our products for new opportunities and there are number of evaluations underway, which we believe are evidence of our ability to provide innovative reliable high-quality solutions for leading-edge applications.

We believe these wins are a result of our consistent investment in technology and global infrastructure, which enhances our collaboration with our strategic customers to meet their demanding requirements and continue to enable the advancement of Moore's Law.

As the industry evolves and technology advances, our customers require greater customization of CMP solutions and our ability to closely collaborate with them with speed is essential.

Supporting our commitment to technology leadership, during recent years we have invested approximately 14% of our annual revenue in research and development activities. In order to get the greatest productivity from our significant investment in R&D, we are now focusing our R&D efforts on our most strategic customers.

Our view is that, as the industry continues to consolidate a limited number of the larger semiconductor manufacturers will have greater and greater influence on the future of the industry.

We are collaborating closely with technology leading customers, research scientist to research scientist in our customers’ time zones and languages to assure that we are meeting the future needs of these important customers.

We believe our global technology footprint is unmatched among CMP slurry and pad providers. Our technical capabilities in North America, Japan, Taiwan, Korea and Singapore enable real-time collaboration as our scientists developed and deliver reliable high-quality solutions with speed.

As technology advances our customers requirements for quality and consistency of our products continue to become more and more stringent. It is very important that we carefully manage our entire supply chain to assure absolute consistency of our products especially for leading-edge applications.

We believe that our quality systems and supply chain management capabilities are world-class and these represent a competitive advantage for us, and our focus on quality continues to demonstrate our commitment to developing high-quality solutions are partnering with our customers.

Concluding my remarks this morning, we are convinced that our commitment to innovation, our global presence and our excellence and quality systems and supply chain management will continue to differentiate us from others in our space.

The trends of advancing technology and greater mobile connectivity continue to introduce a number of technical challenges within the semiconductor industry, such as higher performance, new materials, expanding features and thinner form factors. We believe our company is uniquely positioned to overcome these challenges in collaboration with our strategic customers.

And with that, I’ll turn the call over to Bill.

Bill Johnson

Thanks, Bill, and good morning, everyone. Revenue for the third quarter of fiscal 2013 was $110 million, which reflect strengthening in demand within the global semiconductor industry following relatively soft conditions during the first half of the fiscal year, as well as growth in demand for our QED products.

Revenue was down by 4.9% from the record revenue achieved in the same quarter last year and up 9.6% from the prior quarter. Year-to-date revenue of $316.9 million is essentially even with the prior year.

Drilling down into revenue by business area, tungsten slurries contributed 35.1% of total quarterly revenue with revenue down 8.4% from the same quarter year ago and up 4.9% sequentially.

We believe the decline in demand for PCs with the associated reduction in DRAM demand, which we’ve discussed in the past accounts for our lower tungsten business revenue compared to the same quarter last year.

Dielectric slurries provided 27.8% of our revenue this quarter with sales down 6% from the same quarter a year ago and up 2.8% sequentially. Within dielectrics, year-to-date revenue from our advanced dielectrics business increased by approximately 26% compared to last year.

Sales of slurries for polishing other metals including copper, aluminum and barrier represented 18.3% of our total revenue and increased 12.4% from the same quarter last year and were up 17.9%, sequentially. Year-to-date revenue from our aluminum slurry business more than doubled compared to last year.

Note that in the past, we refer to our copper slurries is also including slurries for polishing aluminum and barrier, with development and changes within the various product lines we will now refer to this product family as slurries for polishing other metals to distinguish them from our tungsten slurries.

Sales of our polishing pads represented 7.7% of our total revenue for the quarter and reflected decrease of 6.5% from the same quarter last year and an increase of 14.2%, sequentially. Year-to-date, our pad revenue is up about 2% compared to last year.

Data storage slurries products represented 4.8% of our quarterly revenue. This revenue was down 0.8% from the same quarter last year and down 2.8%, sequentially.

Finally, revenue from our Engineered Surface Finishes business, which includes QED generated 6.3% of our total sales and was down by 20.6% from the record revenue achieved in the same quarter last year and up 76.3% sequentially. Volatility in our QED revenue is expected given that it is primarily a capital equipment-oriented business.

Our gross profit this quarter represented 49.7% of revenue, which is up from 47.7% in the same quarter a year ago and 48.2% in the prior quarter. Compared to year ago quarter, gross profit percentage increased primarily due to lower manufacturing costs and benefits associated with the weaker Japanese yen versus the U.S. dollar, partially offset by lower sales volume.

The increase in gross profit percentage versus the previous quarter was primarily due to lower fixed manufacturing and logistics costs, and the favorable impact of the weaker Japanese yen. Year-to-date, gross profit represented 48.3% of revenue.

In our fourth fiscal quarter we anticipate some gross margin headwind as we expect higher costs on a short-term basis associated with the transition to a new raw material supply contract with an existing supplier. We currently estimate this headwind will be around 150 basis points. Our full fiscal year gross profit guidance of 46% to 48% of revenue remains unchanged.

Now I’ll turn to operating expenses, which include research, development and technical, selling and marketing, and general and administrative costs. Operating expenses this quarter of $32.4 million were $1.2 million lower than in the third quarter of fiscal 2012. The decrease was primarily due to lower depreciation expense, clean room materials expense and staffing related expenses.

Operating expenses were approximately $2 million lower than in the previous quarter primarily due to lower staffing related costs. Year-to-date, total operating expenses were $100.2 million which is 3.9% lower than during the same period last year. We continue to expect our full year operating expenses to be within a range of $132 million to $136 million for fiscal 2013.

Diluted earnings per share were $0.65 this quarter which includes a $0.05 benefit due to our recent election to permanently reinvest the earnings of our Japan subsidiaries, which lowered our effective tax rate. This is up from $0.55 reported in the third quarter of fiscal 2012.

Our EPS was up from $0.40 in the prior quarter mainly due to higher revenue, higher gross profit margin, lower operating expenses and a lower effective tax rate. Year-to-date, diluted earnings per share of $1.46 is up 17.7% compared to last year. We now expect our effective tax rate for the full year to be between 32% and 34% which is lower than our previous estimate of between 34% and 35%.

Turning now to cash and balance sheet related items, capital investments for the quarter were $4.7 million and depreciation and amortization expense was $4.9 million. We now expect our capital spending for the full year to be approximately $18 million which is lower than our previous estimate of $20 million.

We purchased $10 million of our stock during the quarter. We ended the quarter with a cash balance of $201.6 million, which is $13.3 million higher than in the prior quarter and we have $166.3 million of debt outstanding.

I’ll conclude my remarks with a few comments on recent sales and order patterns. During the third fiscal quarter, we saw an increase in revenue for our CMP consumables products of approximately 7% compared to the prior quarter. As we observe orders for our CMP consumables products received to date in July that we expect to shift by the end of the month, we see July orders trending approximately 8% higher than the average rate in our third fiscal quarter.

However, I would caution as I always do that four weeks of CMP related orders out of a quarter represent only a limited window on full quarter results. In particular, this increase in our July orders is higher than indications for sequential growth that we're hearing in the industry and higher than what we have seen in terms of historical seasonality. So we would urge particular caution about extrapolating too much from this limited data point.

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

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Avinash Kant of D.A. Davidson. Please proceed.

Taryn Kuida - D.A. Davidson

Hi. This is Taryn Kuida calling in for Avinash.

Trisha Tuntland

Good morning Taryn.

Taryn Kuida - D.A. Davidson

Good morning. Could you state again what your July orders were trending at again? I missed that.

Bill Noglows

Three or four weeks on the month of July, they’re trending about 8% higher than the average over the prior quarter. But I pointed out that that’s higher than kind of normal seasonality and it’s also a bit higher than -- actually significantly higher than what we are also hearing from other sources within the industry about possible sequential revenue growth. So we're a bit cautious about it but a strong start to July.

Taryn Kuida - D.A. Davidson

Okay. Perfect. I wanted to confirm the 8%. And then secondly, what let you label as the main driver for the 14% improvement in your pads business. I mean, in the past, you mentioned TSMC represented around 21% and Samsung around 14% customers. So has that mix changed or …

Bill Noglows

No. That mix is a pretty consistent in status for the quarter. TSMC at this point on our fiscal year still represents 21% of revenue and Samsung represents 14%. Generally, we expect to see demand for our pads to track over all patterns in the semiconductor industry. We’re pleased to see demand pick up in this quarter.

We’re learning about the order patterns in our pad business as we grow the business. And we’ll see what the next quarter looks like but as I said in my prepared comments we have had several new wins and our D200 technology continues to get traction. So we remain excited and optimistic about the pads business.

Bill Johnson

Also, Taryn, just to clarify the percentages of TSMC and Samsung of our revenue, that’s not a percentage of our pad revenue. That’s a percentage of our total revenue.

Taryn Kuida - D.A. Davidson

Okay. Thank you.

Bill Johnson

Sure.

Operator

And the next question comes from the line of Edwin Mok of Needham & Company. Please proceed.

Edwin Mok - Needham & Company

Hi. Thanks for taking my question. So first question I have is on the last quarter you mentioned that your aluminum business went up, right. I was wondering what is the driver for aluminum, CMP and how do we kind of think about it over longer term. Do you expect that piece to continue to grow?

Bill Noglows

The aluminum is being used in high-k metal gate technology and it’s being used successfully on high-k metal gate technology. And we expect that technology to extend into the 20 nanometer node, at which time the current expectation is about the material will be replaced by tungsten, which is also, we think is good for us and we already have a number of slurries that we have developed and introduced for that application.

But we’ve been enjoying the growth of aluminum and high-k metal gates now for several quarters. And it continues to sort of delight us in very high growth rates. And we’ve already entered into aluminum market. And we have been working on aluminum, CMP slurries for sometime and we have a leadership position in aluminum, CMP slurries that we think we’ll maintain -- if it goes through ‘20, we’ll maintain our leadership position till ‘20.

Edwin Mok - Needham & Company

Great. That was very helpful. And then you mentioned that you had a strong start in the -- fiscal fourth quarter or calendar third quarter. But then you felt that maybe the industry based on your check is just little lighter than the 8%. Is it just from commentaries so and so from peers? Was it based on seasonality? I’m trying to dig a little bit deeper into that just to kind of understand, why do you think you cannot grow with that rate for this quarter?

Bill Noglows

Well, I think what we’re doing is we’re probably reacting to a lot of what we’ve been listening to around the market that we’re in. I think the biggest factor or concern is the overall macro economic conditions. It appears that China is slowing and China is sort of the consumer of all things. Electronic nowadays, several of our large strategic customers have pulled back their estimates for the remainder of the calendar year.

We continue to watch the smartphone mix shift. We think maybe -- we don’t think, a lot of people think that high-end smartphones have begun to peak and some of the lower-cost, low-end segments primarily driven by China in the emerging markets are beginning to gain traction. And we’ve seen some of the foundries reduce their estimates as well. And then there is continued decline in PC sales concerns all of us in the supply chain and we’re watching that very closely.

I think, as you know, we don’t provide revenue guidance. We have very little visibility into future sales. This is kind of a unique quarter and that we’re four weeks into it as we do this earnings release. So we have a little more visibility into the quarter. But as Bill cautioned and I think he cautioned twice this quarter that it’s only a limited window in our quarterly results.

Bill Johnson

Yeah. Just a couple of more data points, for example, TSMC guided 3% to 5% sequential growth into the September quarter. Intel, I think, said 5%. We listened to IC units -- IC insights and they predict 3% IC unit growth sequentially. So those are kind of low single digits, it’s probably what the industry expectation is.

Edwin Mok - Needham & Company

Okay. So maybe I’m absolutely wrong and ask the opposite question. So historically, if I actually historically as in the last two years if I look at your slurry business actually decline on the September quarter. Do we worry -- should we worry that there could be kind of seasonal factor that may impact you this quarter as well?

Bill Noglows

Bill take…

Bill Johnson

Yeah. I think if you look over the past 13 years -- 13 years, we’ve seen a sequential increase from June to September. But there have been times where we’ve had more macroeconomic factors or things like that that haven’t followed that same seasonality. But statistically, yeah, September has tended to be a seasonally strong quarter for us.

Edwin Mok - Needham & Company

I see. Great. That’s helpful. Two questions, I’ll go away. So first one is on this QED you mentioned that part of that increase is the fact that you have some equipment sales, right? Should we expect that one quarter pop this quarter or is it something sustainable beyond in this quarter and through the calendar second half of this year?

Bill Noglows

We’ve always referred to the QED business as lumpy in terms of revenue driven by the capital cycle. And the QED equipment tends to be, the tools we sell tend to be expensive. And if we sell one or two extra in a quarter, you see it in our revenue as a positive lump. And if we have a quarter where we don’t sell as many tools, we go the other way.

I think we’ve seen what I would describe as steady progress in our QED business. And we expect that the same kind of revenue patterns going forward as we slowly grow that business and introduce new tools to the market.

Edwin Mok - Needham & Company

Okay. That’s helpful. And then lastly, you mentioned that you expect little gross margin headwinds in coming quarter due to this transition in your raw material suppliers, right? How do you -- any way you can kind of quantify what time, how do you expect, is it one percentage point or five percentage points if you can give us some range will be helpful? Thank you.

Bill Noglows

Yeah. The gross margin headwinds that we expect is on the order of a 150 basis points. In our previous disclosures, public disclosures that we’ve talked about an increase in raw material inventory to assure a smooth transition into a new supply contract with an existing supplier. So now we’ve completed that contract and consistent with the industry of that raw material, the new contract reflects an inflation of the suppliers cost and these higher costs are being passed on to us.

So we have a number of means over time to mitigate the higher cost and we expect to implement those over relatively short timeframe. But in the interim, say next quarter or so, we expect these higher costs. And so we’ll have adverse gross margin impact in the fourth quarter on the order of a 150 basis points.

Edwin Mok - Needham & Company

I see. But even if you take this quarter’s gross margin and take a 150 basis point impact to that that will bring your full-year gross margin above your full-year target range, right? Did I get my math incorrect or something?

Bill Noglows

Yeah. Our guidance was 46% to 48%. And yeah, so we should be near the top end of that guidance probably for the full year.

Edwin Mok - Needham & Company

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

Trisha Tuntland

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

Operator

Thank you. Your next question comes from the line of Chris Kapsch of Topeka Capital Markets. Please proceed.

Trisha Tuntland

Good morning Chris.

Chris Kapsch - Topeka Capital Markets

Good morning. Just want to follow up, if I could, to try to take another swipe at this sequential trends that you discussed thus far into the fiscal fourth quarter and maybe against the appreciated comments about the sort of the bifurcation in the industry with mobile devices being strong at the expense, sort of, of PC, legacy PC IC demand being softer.

I’m just wondering can you tell like thus far into the fourth quarter, as your demand that’s up sort of 8% sequentially, is it skewed more towards mobile devices or are you seeing strength in recovery and strength in PC-related IC demand or is it really just across the board or can you knock at that granular?

Bill Noglows

I would describe it as across the board, but we can’t get that granular. I mean that’s probably the best way to describe it, Chris. As the quarter proceeds, we get just sort of more insight into where the sales are occurring and who is buying. But I think we’ve said in the past, we don’t have a lot of visibility. As an example -- just an example in the foundries, we really don’t have visibility into where those shifts go, whether they go to mobile markets or PC markets or laptop markets or tablet markets. We’ll have more granularity when we’ll report our last quarter, fourth quarter earnings.

Chris Kapsch - Topeka Capital Markets

Okay. Can I just ask like is it more accentuated towards say tungsten slurry demand versus oxide or is there particular strength in copper or other metal polishing versus, say, oxide?

Bill Noglows

Yeah. What we do within a month is kind of track orders week-by-week in total and really we don’t really disaggregate those week-by-week. So we can’t tell at this point until we get to monthly close exactly where those would be. So we’re seeing strength in July, but not a lot of visibility like Bill says exactly where that is.

Bill Johnson

Yeah.

Chris Kapsch - Topeka Capital Markets

Okay. And then just following up on the sequential pad improvement in the commentary about some new pad wins, I’m just wondering if, as you are getting these wins and its sort of a cross -- I guess sounds like legacy nodes as well as advance nodes, just wondering if you are able to win that business while still maintaining your intended pad pricing, selling the application, the product on -- the cost of ownership notion given your better pad life as opposed to sort of trying to induce the contracts with lower pricing?

Bill Johnson

Well, we’ve certainly seen price competition with our D100 offering which was our first offering and is our hard pad technology which we expected and we have been competitive to win business and hold our positions. I think our D200 platform creates an interesting opportunity for us. D200 utilizes an advance foaming technology to create both the softness and porosity of the pad which enables the pad to do some very specific things that both leading edge applications and legacy applications.

And our pricing sort of value formula is developing as we introduce that pad and our customers learn more about it and we learn more about it, sort of, in used applications. So I think as we have said in the past, we expect our gross margins for the pad business to approach the gross margins we enjoy for the overall company. I don't think we’ll get to the sort of $0.49 that we talk about today in this quarter.

But we think our approach to those gross margins be a little south of them. But the D200 value proposition is sort of proving itself out as we speak. Its ability to sort of de-customizing and tailored to meet specific requirements is somewhat unique in the industry. And we haven't seen another pad material in the market that has those kind of performance properties. So, again, we remain optimistic and excited about the pad businesses and incremental growth opportunity for our company.

Chris Kapsch - Topeka Capital Markets

Got you. And just a follow up on that comment, about the outlook for gross margins over time, but did the strength in the pad business contribute at all to the sequential gross margin performance or is it negligible compared to obviously the end benefit. But did it contribute positively at all to the sequential positive variance and gross margin?

Bill Johnson

I think given the increase in revenue, I think the answer is probably yes, but it’s a second order relatively small effect. I think the yen is part of that biggest single effect.

Chris Kapsch - Topeka Capital Markets

Okay. And then just finally on -- just so I can understand the supply contract a little bit more. It sounds like the pricing that the higher cost for this particular raw material was actually pass through earlier in the year but you had inventory that you were working off. So you’re not going to see the impact until this coming quarter, is that right?

Bill Johnson

Yeah. That's -- we did have some inventory to work through. So the September quarter would be the first quarter where we’d actually see the impact. We have some things we can do mitigate that higher cost. It will just take a little bit of time to implement those.

So we should see an adverse gross margin effect in the fourth quarter and then when we report results in October for the September quarter, we will have an update on your gross margin guidance for the year and we’ll have maybe more to say about that for the next quarter.

Chris Kapsch - Topeka Capital Markets

Okay. Thank you guys.

Trisha Tuntland

Thanks, Chris. We’ll take our next question, please.

Operator

Thank you. Next question is from the line of Jairam Nathan of Sidoti. Please proceed.

Trisha Tuntland

Good morning, Jairam.

Jairam Nathan - Sidoti

Thanks for taking -- hi, thanks for taking my questions. So, I was going to kind of concentrate on your comment about reinvesting in Japan. What exactly do you mean by that like, are you -- would you be shifting capacity, how should we think about that?

Bill Noglows

Now, this is a -- it's more of an accounting election. So, for example, we do a significant portion of our business through foreign subsidiaries. But in a company's financial results, there is a general presumption that earnings of those foreign subs will eventually be repatriated to the U.S. So from a financial book purpose, those earnings are generally taxed on our financial books at the U.S. rate.

Alternatively, we can assert from an accounting standpoint that those foreign earnings will not be repatriated to the U.S. but instead will be permanently reinvested in that local geography. And we have done this in the past with Singapore and Taiwan and so now in this quarter, we made this election or this assertion with respect to our subsidiaries in Japan.

And it's really based on sources and uses of cash analysis, that we have some intercompany debt between our company that we think that any cash generated in Japan in our subsidiary would be used to repay that. And so there won't be cash to repatriate, earnings to repatriate. So it’s operationally no real impact -- more in accounting election or assertion.

Jairam Nathan - Sidoti

Okay. And along those lines can you -- do you have a breakup of the $200 million in cash, how much of that is in the U.S. and outside?

Bill Noglows

Speaking from memory, but I think around $35 million or so is -- I don't remember off hand, Jairam, I am sorry. It's -- the bulk of our cash is held in the United States. We don’t have a significant trap cash issue or issue of cash outside of the country. I don’t remember off hand what that amount is, sorry.

Jairam Nathan - Sidoti

No problem. And you mentioned -- as far as the raw materials cost, you mentioned, you know, some measures to offset that, can you kind of go into further details in what those could be? And if I look at your COGS, how much is raw material, how much did this raw material make as a percent of cost of goods sold?

Bill Johnson

Well, I’ll start the answer because we have -- we clearly have actions we can execute with pricing and cost management and reduction and we are undertaking those or executing those initiatives as we speak. The particles in our CMPs always tend to be the highest cost on a variable cost basis in our products.

So, the cost of those particles and our ability to engineer CMP Solutions as we talked at many times in the past, we are -- the concentration of particles in our CMP Solutions has steadily going down at point of use by sort of some very creative formulation capability by our scientists. So we have some ability to manage increasing variable cost of both pricing actions and cost reduction actions and formulation actions in a sort of creation of new products that use less and less of these high cost particles.

Jairam Nathan - Sidoti

Okay. Okay. That's all I had. Thank you.

Trisha Tuntland

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

Operator

Thank you. The next question is from the line of the Dmitry Silversteyn of Longbow Research. Please proceed.

Trisha Tuntland

Good morning Dmitry.

Dmitry Silversteyn - Longbow Research

Good morning. Congratulations on a nice quarter despite some top line challenges. Question for you when you mentioned in your prepared remarks about refocusing your R&D efforts on sort of more strategic customers, is that really just sort of repurposing the dollars or can we expect either in terms of dollars or in terms of percentage of revenues your R&D spend to decline or to increase as you go through this initiative?

Bill Noglows

Yeah. I think Dmitry that’s a great question. We expect our R&D spending to remain relatively flat in the near term as we work our way into what I would describe as this new repositioning of our assets around the world. It’s really the people that are employed by the company, excuse me -- and how they interact with our customers and who they interact with. We’ll have to wait and see.

This is relatively new to us. We’ve been added now for probably a quarter and half and we’re going to have to wait and see what the overall impact is on the efficiency and productivity of our R&D dollars as a result of this repositioning and refocusing on the technology leaders.

I think as we get more visibility into our success, we will certainly talk about it, talk about whether we think there is -- that’s worth increasing R&D spending. As we’ve talked in the past, we don’t typically think about percent of revenue. We think of the number of projects and the profitable projects we can work on, the JDAs but we’re going to learn our way through it. But I think for this near term, we could expect to see the same kind of R&D spending as we’ve seen historically.

Dmitry Silversteyn - Longbow Research

That’s helpful. But that’s also actually nice segue into my next question, can you talk a little bit about the competitive landscape that you’re facing in the slurry industry and then perhaps separately just the quick comment on the pads industry. But as you go down the nodes and as the technology requirements get more and more sophisticated with different metals and different electrics, the idea was that would provide higher, higher barrier not just for new entrance, but for the existing smaller companies to sort of stick around. So can you -- this have been about a year and half since we talked about it. Can you sort of update us on what’s going on in the industry as far as competition is concerned?

Bill Noglows

Well, I think I said in my comments this morning, we have been working very hard to maintain and enhance our technology leadership around the world. Really, has had a very strong focus in quality and quality systems and supply chain management. And then the third leg of that strategy has been the infrastructure buildout we’ve had in these parts of the world where some of our very significant strategic customers are.

And you know we’ve done that so we can enhance the ability to collaborate with these customers and that what we find in those collaborations as most important is speed number one. But having scientist and engineers, they can deal with our customer scientist and engineers in their own language, in their own time zones and move very quickly with sort of iterative process development and product development.

And because we have all these facilities on the ground now in Taiwan and South Korea and Japan and Singapore and the U.S., we’re able to do that collaboration real time and do it very quickly with our customers and they appreciate it. And I think that get us to the table as our customers are thinking about it advanced node technologies.

This renewed focus on R&D is I think appropriate. And I believe that it will be successful. The environment in generally it is getting very difficult. Many of our customers are struggling it 20 nanometer technology to get yields. And I think it will just get more and more difficult for them and for us and we like hard stuffs because we think our scale and our breadth and depth is unique in the industry for CMP slurries, and CMP slurry development and our emerging pad business as well.

So, I meant what I said, when my comments is more, I think Cabot Microelectronics is uniquely positioned for the challenges of the future and we will continue to do what we’ve done and invest in those three legs of our overall strategic process.

Dmitry Silverstein - Longbow Research

Okay. A couple of house keeping questions to finish up. First of all, you mentioned lower depreciation in the quarter, was that specific item led to that and is that the sustainable rate going forward?

Bill Noglows

Yeah. You would expect, I think it’s another kind of second order factor, but it was a factor and large enough so we called it up. But, yeah, given the nature of depreciation that, you’d expect that to persist going forward.

Dmitry Silverstein - Longbow Research

Okay. And then, final question on variable performance comps that in terms of bonuses and what not that you guys get after a good year? If they are to happen would we expect them to happen in the September quarter?

Bill Noglows

Well, we adjust incentive comp quarter-by-quarter based on the expectation of full year performance against goals, kind of quarter-by-quarters. So we true that up throughout the year.

Dmitry Silverstein - Longbow Research

Okay. So, I’m trying to understand, Bill, how to interpret you, you only got one quarter left in your operating expense, but you haven’t reduce sort of your annual range. So is that range so wide because you’re not sure where the true-up will be in the September quarter?

Bill Noglows

No. That’s because we don’t tend to tune guidance quarter-by-quarter, so it remains unchanged. But, yeah, given the math in the prior three quarters, you’d expect us to be some place near the middle of that range.

Dmitry Silverstein - Longbow Research

Okay. Fair enough. Thank you very much.

Trisha Tuntland

Thank you, Dmitry.

Operator

(Operator Instruction) And the next question is again from the line of Avinash Kant, D.A. Davidson. Please proceed.

Taryn Kuida - D.A. Davidson

Hi.

Trisha Tuntland

Hi, Avinash.

Taryn Kuida - D.A. Davidson

This is Taryn Kuida again. Just a couple of quick follow-ups. You mentioned that yen was a single largest effect of the gross margin, hence what -- how much of the gross margin improvement was driven by the weaker yen versus…

Bill Johnson

Yeah. If you look at the sequential increase 150 basis points about a third of that was foreign exchange related, so 50 basis points. If you look year-over-year, our gross margin was up by 200 basis points and the yen effect increased that by about 130. So say two-thirds or so of that.

Taryn Kuida - D.A. Davidson

Okay. And then the SG&A, it declined $2 million from the prior quarter and $1 million from the prior year, was that organic or does that, or how much was driven by the reinvestment launch in Japan and what kind of run rate going forward?

Bill Johnson

Yeah. The reinvestment assertion in Japan really, really impacted the effective tax rate, so not operating expense. And really quarter-to-quarter we see some fluctuations, quarter-to-quarter an operating expense, so really you cited SG&A but we think of operating expense kind of in total.

So I think what we saw this time we called out a few cause, as one them was staffing-related costs. That was just within the kind of the normal fluctuations quarter-to-quarter, I think.

Taryn Kuida - D.A. Davidson

Okay. And then could you reiterate what your operating income guidance was again?

Bill Johnson

We don’t provide guidance on operating income. Gross margin guidance for the full year 46% to 48%, and then we have operating expense guidance of $132 million to $136 million.

Taryn Kuida - D.A. Davidson

Okay. Thank you.

Trisha Tuntland

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

Operator

Thanks for joining today’s conference ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day.

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Cabot Micro (CCMP): FQ3 EPS of $0.65 beats by $0.07. Revenue of $110M  (PR)