Cabot Microelectronics Corporation F4Q09 (Qtr End 09/30/09) Earnings Call Transcript

Oct.22.09 | About: Cabot Microelectronics (CCMP)

Cabot Microelectronics Corporation (NASDAQ:CCMP)

F4Q09 (Qtr End 09/30/09) Earnings Call Transcript

October 22, 2009 10:00 am ET

Executives

Amy Ford – Director, IR

Bill Noglows – Chairman, President and CEO

Bill Johnson – VP and CFO

Analysts

Steven O'Rourke – Deutsche Bank

Avinash Kant – D.A. Davidson & Company

Dmitry Silversteyn – Longbow Research

Gertrude Balkgisan [ph] – Buckingham Research

Operator

Good day ladies and gentlemen, and welcome to the fourth quarter 2009 Cabot Microelectronics earnings conference call. My name is Litrice and I will be your coordinator for today’s call. (Operator instructions) At this time, I would like to turn the call over to your host for today’s conference, 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 2009, which ended September 30th. A copy of our press release is available in 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. A descript 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 2009 ended June 30th, 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.

Bill Noglows

Thanks Amy. Good morning everyone and thanks for joining us. We are delighted to close this challenging fiscal year with strong financial results in the fourth fiscal quarter during which we achieved revenue of $96.5 million, which is only $0.5 million below the quarterly revenue record we set in the June quarter of 2008. In addition, we attained a gross profit margin of 48.4% of revenue, our highest level in two years, record EPS of $0.52 when compared to historical results adjusted to include share-based compensation expense and cash flow from operations of $28.5 million. We are pleased with our overall performance in fiscal 2009, which was a challenging year for us and our industry. We were adversely impacted by the severe global economic recession – while we were adversely impacted by the severe global economic recession, we continued to successfully execute on our strategic initiatives and maintained and reinforced our customer phasing activities. During this difficult period, we grew our CMP pad business by 17%.

We completed our successful acquisition of Epoch material company. We introduced next-generation products in all major application areas, and we achieved over $12 million in operating expense savings, with minimal impact to our workforce and development activities. We are also delighted to report that our Epoch acquisition was accretive to our earnings in fiscal year 2009, and also positively impacted our gross profit margin, despite the severe economic downturn and expenses associated with purchase accounting rules.

In addition, the acquisition of Epoch has allowed us to enhance our leadership position in copper CMP slurry applications. We believe our flexible business model, solid balance sheet, and experienced management team enabled us to successfully manage our company during this significant decline in demand for our products over the first half of the fiscal year, as well as during our extraordinary recovery in the second half of the year. We believe our strong performance and commitment during this challenging period has positioned us well for continued success, as the economy in the semiconductor industry recover and over the long term.

We ended fiscal 2009 on a high point, but we remain somewhat cautious regarding future demand trends over the near term. We are entering a calendar period of typically lower seasonal demand within the semiconductor industry and there are mixed signals as to the phase and timing of the recovery, particularly in the US economy. However, having said this, I had recently returned from spending four weeks in the Asia-Pacific region, and I am encouraged by what a number of our customers said about their outlook for the near term.

Further, research has shown that over the past 30 years, there have been at least two years of double-digit semiconductor industry revenue growth following every global recession. Since we cannot predict the exact timing and magnitude of an economic recovery, we plan to continue to manage our business to maintain flexibility and respond quickly to changing trends as we successfully demonstrated during the fiscal 2009. We believe that the solid results we achieved this year reflect a consistent focus on our primary strategy to strength and grow our core CMP consumables business through the execution of our three strategic initiatives, technology leadership, operations excellence and connecting with customers. For the coming year, we continue to put all of our energy and resources into these strategic initiatives as they have served us well and we believe they will differentiate us from our competitors.

As evidence of our success in our drive to maintain technology leadership, our new product vitality metric, which measures the portion of our sales that are driven by products commercialized within the past three years, grew nearly 40% from fiscal 2008. As we looked at current product development activity, we are excited about our new barrier polishing slurry, which is now being evaluated by more than 20 customers, as well as our new copper polishing slurry that is designed for low cost, high throughput and tenability [ph]. In addition, through our close collaboration with several logic device manufacturers, we are now supplying CMP polishing slurries for aluminum applications. These slurries are typically used for polishing metal gauge structures within the most advanced logic devices. Currently, this is a small niche business area, but we believe that exemplifies the number of CMP applications continues to grow with the advancement of chip designs and how Cabot Microelectronics is uniquely positioned to serve these emerging applications.

Another exciting new technology on which we are working is the development of our second-generation CMP polishing pad. Our current CMP pad offering, the D100 is a very robust solution for a wide range of CMP polishing applications and technology nodes. Designed to serve an even greater range of customer applications, our second-generation pad, which we call the D200 is a tunable technology platform, which should also provide extended pad life and improved device yield performance just like the D100. The D200 technology is designed to allow us to adjust both the hardness and porosity of the pad, enabling us to customize solutions to meet the varying needs of our customers. Last quarter, we began after sampling the D200 with the select group of strategic customers and have been encouraged with the results to date.

Next, I would like to discuss our achievements through our operations excellence initiatives have contributed to our solid performance this year. As you know, utilization of our manufacturing capacity affects our profitability at the gross profit level. To minimize the impact of our lower capacity utilization due to the severe downturn without sacrificing our operations, quality or intellectual capital, we temporarily reduced work schedules across our manufacturing facilities earlier in the year. By taking this approach, we were able to act quickly and reduce costs when demand was low by maintaining our experienced workforce to swiftly and successfully ramp up production to meet the sharp increase in demand for our products during the second half of our fiscal year.

Despite the adverse effect of lower manufacturing capacity utilization on our results, we were still able to achieve a modest productivity improvement in our manufacturing operations for fiscal 2009, marking the fifth consecutive year of positive productivity enhancements. This year’s results were driven by improved manufacturing yields particularly within our CMP pad business, where we have continued to achieve higher yields every quarter since we began high volume manufacturing in fiscal 2008. Also contributing to our productivity improvements this year were logistics optimization initiatives, favorable pricing negotiations on purchase materials as well as the benefit of our ongoing efforts to optimize our manufacturing capacity.

Looking forward, we are excited about the role, our acquisition of Epoch is expected to play in our operations excellence initiative. As you know, Epoch is located in Taiwan, which is the largest CMP consumables market in the world. Through this acquisition, we now have a significant manufacturing and development footprint close to some of our largest customers in both Taiwan and China. We are already leveraging Epoch’s automated warehouse to drive meaningful logistics synergies and we are utilizing our global buying power to realize purchasing synergies. Over the longer term, we are also exploring opportunities to expand production at our Epoch plant in order to further optimize our manufacturing logistics costs. Our acquisition of Epoch also supports our key initiative of connecting with customers. As part of the integration of Epoch, we expect to leverage its strong customer relationships an extensive infrastructure in Taiwan to enhance our ability to collaborate more effectively with our customers there and in China.

Also in Taiwan, we completed the installation of our on-site pad finishing facility at TSMC, achieved ISO 9001 certification and have begun supplying pads to TSMC from this new facility. We believe this type of collaboration is unique in the industry and has the potential to cultivate increased interaction on a day-to-day basis with this important strategic customer. Another illustration of success with our connecting with customers’ initiative is our progress on customer adoptions for our D100 CMP polishing pad. Most recently, we gained three new customer application wins in our fourth fiscal quarter, and as an indication of the success we have achieved, we are now selling our pads to nearly all the IC manufacturers in Taiwan. Beyond pads, we have also continued our ongoing participation in a number of joint development programs with our customers. As the largest CMP slurry supplier with extensive CMP knowledge and breadth of experience, we are well positioned to be the trusted partner of our customers when it comes to developing reliable, low cost and innovative solutions to solve today’s challenges and help enable tomorrow’s technology.

In parallel with our efforts to strengthen and grow our core CMP consumables business, we are continuing to execute on our strategy to advance our Engineered Surface Finishes business or ESF. Under this strategy, we continue to work on cultivating our two ESF acquisitions, QED Technologies and Surface Finishes as well as supplementing these efforts with our own organic development in few focused areas. During fiscal 2009, QED which represents the largest portion of our ESF business continued to pursue its business strategy of increasing its sales of standard machines and expanding its global customer base. Also, we are excited about QED’s new ASI metrology system, which is the first commercial metrology solution that enables widespread use of non-spherical surfaces or aspheres in optical systems design. This is important because aspheres have the ability to drag, reduce weight, size and the cost of optical systems.

Looking forward to fiscal 2010, we plan to continue to execute on our primary strategy of strengthening, growing our core CMP consumables business. As an element of our primary strategy, we continue to pursue potential acquisitions that we expect will exhibit a high degree of strategic fit with our company and we are focusing on opportunities that would allow us to leverage our world class supply chain management quality systems and global infrastructure. In pursuing these opportunities, we hope to bring more products to our existing customer base such as we have accomplished with Epoch. We are encouraged by the progress we have made this year on our strategic initiatives, which we believe positions us well to emerge from this recession, with stronger competitive standing within our core CMP consumables business. Our product pipeline is robust, we have a talented team of dedicated and experienced employees, and we have the financial strength to take advantage of potential opportunities as they arise. In our view, there are number of indications that the semiconductor industry has begun to stabilize, but we are still cautious regarding near term industry trends.

We remain confident in our ability to adapt to a range of industry environments such as we demonstrated in fiscal year 2009 and we are optimistic about the long-term growth prospects for our company across all of our business areas. And with that, I will turn the call over to Bill Johnson. Bill?

Bill Johnson

Thanks Bill, and good morning everyone. Revenue for the fourth quarter of fiscal 2009 was $96.5 million, which was up by 7.1% from the fourth quarter of last year and up 11.6% from the prior quarter. The increase in revenue from the same quarter last year primarily reflects contributions from our acquisition of Epoch in February 2009. Excluding the revenue contribution from Epoch, our quarterly sales were roughly in line with the same period last year. Compared to the prior quarter, revenue increase across all of our business areas led by sales to manufacturers of logic devices. Total revenue for the full fiscal year was $291.4 million, which represents a 22.3% decline from fiscal year 2008. Despite the adverse impact of the global recession on sales of our slurry products for semiconductor applications and our ESF business, revenue for our CMP pads as well as our data storage slurries increased from the prior year.

Drilling down into revenue by business area, tungsten slurries contributed 34.7% of total quarterly revenue, with revenue down 9.5% from the same quarter a year ago and up 2.1% sequentially. For the full year, tungsten slurry revenue decreased by 27.3%. Sales of copper products represented 19% of our total revenue and increased 46.3% from the same quarter last year and 22.9% sequentially. For the full year, our copper product revenue decreased by 9.3% as the adverse impact of the global recession was partially offset by contributions from Epoch. Also included in our copper business is our barrier removal product line, revenue from which increased this year by 8.3% from fiscal 2008. Dielectric slurries provided 29.3% of our revenue this quarter, with sales down 1.5% from the same quarter a year ago and up 6.7% sequentially. For the full year, dielectric slurry revenue decreased by 28.6%.

Data storage slurry products represented 5.7% of our quarterly revenue. This revenue was up 92.7% from the same quarter last year and up 29.3% sequentially. For the full year, revenue for data storage slurries increased by 7.3%, benefitting from an important customer win at the end of fiscal 2008. Sales of our polishing pads represented 6.7% of our total revenue for the quarter and increased 18.4% from the same quarter last year and 23.8% sequentially. For the full year, polishing pad revenue was up by 17.2% as we achieved application wins with new and existing customers.

Finally, revenue from our ESF business, which includes QED, generated 4.7% of our total sales and was up 24.1% from the same quarter last year and up 60.7% sequentially. For the full year, ESF revenue decreased by 34.2%, driven by the adverse capital equipment environment. Our gross profit this quarter represented 48.4% of revenue compared to 46.6% in both the same quarter a year ago and in the prior quarter. Compared to the year-ago quarter, gross profit percentage increased primarily due to increased utilization of our manufacturing capacity, improved manufacturing yields, and lower logistics costs, partially offset by a lower valued product mix. The increase in gross profit percentage versus the previous quarter was primarily due to increased utilization of our manufacturing capacity. For the full year, gross profit as a percentage of revenue was 44.1%, which was down from 46.5% last year, primarily due to decrease in utilization of our manufacturing capacity driven by the severe economic environment.

Now, I will turn to operating expenses, which include research, development and technical, selling and marketing, and general and administrative costs. Operating expenses this quarter of $28 million were 11.8% lower than the $31.7 million reported in the fourth quarter of fiscal 2008. The decrease was primarily driven by lower staffing related costs, lower professional fees, which include costs to enforce our intellectual property and lower travel expenses. These cost savings were partially offset by incremental expenses related to Epoch. Operating expenses were $2.9 million higher than the $25.1 million reported in the previous quarter, mainly due to higher staffing related costs, professional fees and expenses for clean room materials. For the full fiscal year, total operating expenses were $112.4 million, which represents a $12.6 million or a 10.1% decrease from the $125 million reported in fiscal 2008, as we implemented focused cost reduction initiatives. The decrease was driven primarily by lower staffing related costs, professional fees, and travel expenses. These cost savings were partially offset by incremental Epoch-related expenses, including $1.4 million write-off of in-process research and development expenses required by purchase accounting rules.

We are pleased with the cost savings that we achieved in fiscal 2009 and expect to continue this cost discipline into fiscal 2010. Looking forward, assuming solid performance against internal goals, we expect certain temporary cost savings initiatives to end during fiscal 2010, such as the suspension of certain employee benefits and a return to more normal levels of variable compensation. In addition, fiscal year 2010 will include a full year of Epoch-related operating expenses compared to just seven months in fiscal 2009. Taking all of these factors into account, we expect our operating expenses for full fiscal year 2010 to be in the range of $120 million to $125 million. This represents a flat to slightly lower spending outlook from what we achieved in fiscal 2008, as we aim to more than offset the incremental costs of Epoch. Diluted earnings per share were $0.52 this quarter, up from both the $0.36 reported in the fourth quarter of fiscal 2008, and $0.39 reported in the prior quarter, on the higher level of revenue and higher gross profit margin. Diluted earnings per share for the full year were $0.48, which was down from $1.64 in fiscal 2008, reflecting the global economic recession.

Turning now to cash and balance sheet related items, capital additions for the quarter were $1.7 million, bringing our full-year capital spending to $8.5 million. For fiscal 2010, we expect capital spending to be around $13 million. Depreciation and amortization expense was $6.3 million for the fourth quarter and share-based compensation expense was $2.8 million. We ended the quarter with a healthy cash balance of $200 million, which was $28.7 million higher than last quarter and represents more than $8 per share. In addition, we have no debt outstanding.

I will conclude my remarks with a few comments on recent sales and order patterns. Examining order patterns within the three months of our fourth fiscal quarter, we saw a demand for our CMP consumables products trend relatively flat across all three months of the quarter at about the same level as we experienced in June. As we absorb 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 at roughly the same rate as we have seen for the past four months. 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 will turn the call back to the operator as we prepare to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) And our first question comes from the line of Steven O'Rourke with Deutsche Bank. Please proceed.

Steven O'Rourke – Deutsche Bank

Hi good morning. Thank you for taking my call. Couple of questions. First, could you give an indication of what ASPs did last quarter and how you think they trend in Q4, and then I have a follow-up question on the pad business?

Bill Johnson

Steve, our ASPs were up 2.5% sequentially, driven by three equal factors, higher prices, a more favorable product mix, and foreign exchange rate changes. If you look at the full fiscal year 2009, ASPs were roughly flat with fiscal 2008.

Steven O'Rourke – Deutsche Bank

Okay. And with respect to the pad business, you talked about the D200 new product that is sort of an alpha testing now, when would you expect initial qualification and initial revenue? Is this intended to supplant the D100 product line, and is it substantially different such that it could maybe accelerate penetration?

Bill Noglows

Steve, this is Bill, the other Bill, Bill Noglows. You know, D200 is a technology that allows, what I would describe is a broader and more flexibility to serve our customers’ needs. It gives us the ability, as I said in my prepared comments, to control the porosity and hardness of the pad. And so, we think it will find its way into applications where maybe the D100 is and as strong as we like it to be. You know, I was – I got out a little in front of D100 when we were working to commercialize that pad and I am not going to sort of make any forecast or predications about D200. I think it’s very early in that development process for D200. We are doing what we always do, we are being very deliberate, I mean, very thoughtful about the way we bring the product to market. We like to bring technologies to market that are relatively robust and hopefully we are doing the same thing with D200. That being said, we are out there alpha sampling with a couple of our strategic customers and so far, we are very optimistic about the technology and its applicability in several CMP polishing applications.

Steven O'Rourke – Deutsche Bank

Fair enough, and one last question on the pad business, you talked about very strong penetration with customers in Taiwan for the D100, can you talk about outside of Taiwan?

Bill Johnson

Much the same, much the same. Steve, I think Taiwan, we were there early, and we had a significant number of resources and infrastructure on the ground in Taiwan. We have a terrific team there of leaders and managers and technologists. They were able to drive our pad sales very aggressively in Taiwan, and we are delighted with their performance. But we see the same thing around the world, and as we have expressed before, it’s a challenging call, pad call, but what we are clearly seeing is the value that we are delivering. You know, this is a small industry and word gets around and people are clearly seeing that we are bringing longer pad life and in many cases, lower defect performance to these customers. And I think in our comments, we still have 30 other opportunities in various stages of testing and evaluation and qualification. Today, we have some, over 20 customer adoptions for some 30 applications. So, we are happy with the progress we are making, and we think we will continue to sort of see more and more gains as we go forward.

Bill Noglows

Steve, there’s another data point on the pad business. If you remember, in fiscal 2008, we had about $15 million of pad revenue and roughly broke even on a gross profit margin basis. In fiscal 2009, we had $18 million of pad sales and achieved a positive low-double digit gross margin for that product. We talked about the improving yields that we are getting in the pad business, but with different penetration, cost control, we are happy to see a positive gross profit margin, again low-double digits for pads for fiscal year ’09.

Steven O'Rourke – Deutsche Bank

Fair enough, thank you very much.

Operator

And our next question comes from the line of Avinash Kant with D.A. Davidson & Company. Please proceed.

Avinash Kant – D.A. Davidson & Company

Good morning. First question on the acquisition area, you did talk about some possible acquisitions. Now, if you were to make some, would you be focusing more on the pads or the flurry side, or you would try to expand more into the non – more like the ESF kind of businesses?

Bill Noglows

Avinash, we are clearly focused on extending our ability to support our existing customers, both materials and around the CMP process as well as additional materials. You know, we have a – we believe is a core competency in the strength in materials in chemistry and we would like to build on that core competency as well as leverage the infrastructure we built around the world. So, our focus is to strength and grow our core CMP consumables business, in support of the semiconductor industry, and look for opportunities to make, bring more materials related products into our supply chain.

Avinash Kant – D.A. Davidson & Company

Okay, Bill. And more on the near term though, you did talk about, of course business kind of remaining flattish, at least in the current month compared to the last quarter. If assuming business were to be flat quarter-over-quarter, in the December quarter, should we expect the cost structure to be very similar to what you have had in the September quarter, or we should expect some cost to come back in the December quarter on similar revenues?

Bill Johnson

Avinash, we gave guidance on operating expenses of range of $120 million to $125 million for the full year, and if you just spread that equally across four quarters, that would imply a little bit higher costs in the four quarters of fiscal year 2010. Some of that’s related to a bit of a relaxation of some of the cost controls, the more severe cost controls that we implemented in fiscal 2009, including return of some of the employee benefits. So, I think it has been about slightly higher costs at an operating expense level going forward in 2010.

Avinash Kant – D.A. Davidson & Company

Okay. And in the gross margin though, you have had very strong uptick there. Do you think this is more of a sustainable, or there are something out of ordinary in the current quarter regarding the mix or something that’s kind of pushed the margin higher which could again come down going forward?

Bill Noglows

Well, the gross margin is higher mainly on higher capacity utilization today. So to the extent, business stayed at this level, we would continue to enjoy that higher utilization. But a couple of the other factors impact our gross profit margin, one of these product mix, and that can move our gross margin around a point or so quarter-to-quarter, additionally manufacturing yields and things like that. But what we saw this time, as I mentioned and answered to Steve’s question is, you know, more of a contribution at the gross profit level from pads, and in addition, Epoch was accretive to the company at a gross profit level as well as in EPS level. So, there are couple of lists. In the face of those lists, so we have kind of ongoing pressure from customers for lower costs and so that’s sort of a constant headwind that we are working against.

Avinash Kant – D.A. Davidson & Company

Okay. And final question, in terms of inventory, would you think that there’s much of an inventory either in the semiconductor food chain at this time or of your products at your customers?

Bill Noglows

Our view is that inventories are at a relatively low level right now, Avinash. We feel like a lot of the inventory correction that occurred last quarter is done and that what we are seeing right now is normal demand.

Avinash Kant – D.A. Davidson & Company

You are talking just your product or also the semiconductor?

Bill Noglows

All the way through.

Avinash Kant – D.A. Davidson & Company

All the way through. Any specific thing about the wireless side or the logic side or microprocessor side, any comments there from any of the customers that you have heard lately?

Bill Noglows

No, but I can just share with you. You know, I said in my comments that I just came back from four weeks in the Asia-Pacific region and I come back pretty optimistic based on what our customers have told us. We believe that it's certainly in the foundry side that all the leading edge technology fabs, 300-millimeter fabs are running close to 100%. In general, we think they are running at in total or a little over 90% capacity utilization. And I think TSMC has come out and been, I think optimistic about 2010 and feel like they will be back to 2008 levels in 2010. So, I think if you get out of the United States and you get over to places like China and Taiwan and South Korea, you get a totally different feeling about the optimism and potential of these economies. So, I come back from that trip feeling pretty good about what we see going forward. But we are cautious as we always are, we are cautious. We don’t have the visibility we would like to have, and I just need to say that because we just don’t know as well as we would like to.

Avinash Kant – D.A. Davidson & Company

Absolutely, thank you so much.

Amy Ford

Thanks Avinash. We will go ahead and take our next caller please.

Operator

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

Dmitry Silversteyn – Longbow Research

Good morning. Just wanted to, first of all, congratulations on finishing a year on such a strong note, it’s good to see margins respond to topline growth. Couple of questions. Number one, you mentioned that so far, for the first two or three weeks of October, you are looking at revenue trends similar to what you saw in the September quarter, seasonally we should be expecting lower revenues. So, are you suggesting that you are still looking for lower revenues or that this may be better than seasonal performance in the December quarter?

Bill Noglows

Well, two things, Dmitry, and those comments will what we see in the first couple of weeks of this month, which are, you know, look just like the three months that we just completed at Q4. This is traditionally a low point in the seasonal cycle and to date, we haven’t seen it. I think who knows at this point in time, what’s going to happen. I think that’s the big concern right now is what’s going to happen as a result of the holiday season and will we see a drop-off at some point in the cycle. Again, we don’t have that kind of visibility. Right now, we continue to see our sales level with a high level that we just reported in Q4.

Dmitry Silversteyn – Longbow Research

Okay. All right, thanks Bill. Secondly, your QED sales after being found – and really kind of bumping along the bottom for this past several quarters, it seems like it may move up, I think it was like more than 20% year-over-year and something sequentially. Was this just a couple of large orders coming through, I mean this is typically a lumpy business, so we shouldn’t be reading too much into this in terms of the equipment side coming back, or you seeing some fundamental improvements in the end markets for QED products, or I should say Engineered Surface Finishes products?

Bill Noglows

Yes, let’s just focus on QED, you know, it’s capital equipment company, they suffered the same painful year than many capital equipment companies have suffered over the last two or three quarters. As you know, you said it well. It’s a lumpy business. They sell – the business sells one or two or three big pieces of equipment in the quarter and it’s a great quarter. They had some additional orders this year. We feel pretty good about the backlog of orders going forward, and we are excited about the new technology that I talked about in my prepared comments, this aspherical stitching interferometry, which we think is unique and brings a lot of value to that high end precision optics market. So, in general, we are optimistic about our QED business as it comes out of this capital equipment cycle, and we will see what happens.

Dmitry Silversteyn – Longbow Research

Are you seeing more sales and more backlog in kind of the traditional higher end pieces of equipment or in this newer product line that you launched for the middle market optical houses, that’s a little bit cheaper and looks a little (inaudible)?

Bill Johnson

Yes, the main backlog right now is around this new ASI system, which is for our aspherical surfaces. That was just recently introduced at a trade show, and we are encouraged, we got three orders for that, really excited on seeing. So, we are encouraged by the start, but that’s really the bulk of the backlog right now.

Dmitry Silversteyn – Longbow Research

Okay. That’s helpful. You talked about foreign exchange being a little bit of an issue with ASP, positive in this quarter, but it has been kind of jerking around your ASPs a little bit, can you – if you look out into fiscal 2010, and you are probably going to be seeing weaker dollar comps year-over-year, is it going to expect to have a meaningful impact on your profitability levels one way or the other, can you just give us an idea what yourself, really to foreign exchange is?

Bill Johnson

Yes, the answer is – short answer is don’t expect others (inaudible) possibility. When we talk about average selling price, ASP, that was with respect to the impact of mainly stronger Yen on revenue, but we have substantial amount of our costs are also denominated in Yen. So, if you look at P&L by currency, we have a pretty natural hedge with respect to both the Japanese Yen as well as the new Taiwan Dollar. So, at a bottom line effect, even if it’s plus or minus at a revenue level, it’s interested to come out and wash and not have a significant bottom line effect.

Dmitry Silversteyn – Longbow Research

Okay, so maybe some translation in picking the topline, but no profit dollar, sounds like?

Bill Johnson

Very minor.

Dmitry Silversteyn – Longbow Research

Okay. You talked about the $18 million in sales for the pad business this year and low-double digit gross margin. In the past, you have given us out kind of with the gross margin, at least gross profit dollars were roughly for the pad business, given the search that you have seen in pad volumes, can you give us an idea what the gross profit for the business is?

Bill Johnson

I would not say anything more specific than just the low-double digit level. I think that’s all the color we can provide right now.

Dmitry Silversteyn – Longbow Research

That’s for the year overall, right?

Bill Johnson

That’s correct.

Dmitry Silversteyn – Longbow Research

And you are referring to margin, but in terms of gross profit dollars for the fourth quarter?

Bill Johnson

I don’t think I could be more specific, but you might guess a low-double digit gross margin percentage applied to the $18 million. I can’t tell you more than that, sorry.

Dmitry Silversteyn – Longbow Research

All right, that’s fine, Bill. Can you provide us an updated guidance on the gross margin expectations for the company for fiscal 2010? You went outside a little bit of your range this quarter. I understand a lot of that was due to revenue growth and what you have done on the cost side, are we still about 46% to 48% range for 2010, and should we be thinking more towards the top end of that range if the revenues are sustainable here in the 90s per quarter.

Bill Johnson

Right now, given the uncertainty in the economic environment and given the impact of revenue on gross profit margin, we are not providing gross profit margin guidance at this time. You will recall that over the past three years, we have had gross profit margin guidance in the range of 46% to 48% for the full year, and I think we have operated generally within that. Occasionally, for a particular quarter, we may fall out of that range. Again, given the uncertainty, we are not providing guidance going forward, but I would tell you that we are encouraged by progress in pads, we are encouraged by the accretion to gross profit margin by Epoch. Again, we are facing the same headwind that we have in the past of customers wanting lower costs and sometimes that translates to lower pricing. So, the focus of the company is kind of maintaining healthy gross margins, but again, that’s sort of let it go, we are not providing specific guidance at this time.

Dmitry Silversteyn – Longbow Research

Okay, thank you.

Bill Johnson

Thanks Dmitry.

Amy Ford

Yes, thanks Dmitry. We will go ahead and take our last caller, please.

Operator

And our next question comes from the line of John Roberts with Buckingham Research. Please proceed.

Gertrude Balkgisan – Buckingham Research

Hi, this is actually Gertrude Balkgisan [ph] sitting in for John. Good morning and great quarter.

Bill Johnson

Thanks.

Gertrude Balkgisan – Buckingham Research

So, first off, the D200, does that allow you to address any markets that the D100 couldn’t because of technological limitations?

Bill Johnson

Well, the D100 pad is what’s categorized as a hard pad and the D200 process technology allows us to sort of tell the hardness of the pad to the application. So, we think it will find its way into some of the softer pad applications for CMP polishing pad. So, it does open a door for a bigger market for us to pursue some applications that the D100 is not – it works, but it’s not as optimal as we would like it to be. So, the D200 gives us the ability to sort of target some of those markets.

Gertrude Balkgisan – Buckingham Research

So, are these markets that you currently aren’t penetrating?

Bill Johnson

We penetrated some of them, but we just feel like – back up, I mean part of what we do here at Cabot Microelectronics is we do our best and never sit back and think we have a great product that’s going to take us into future. We are always thinking about next-generation technologies in all of our product areas. And our way of thinking D200 is just an extension of our capability, and we have learnt a lot through our introduction and commercialization of D100, and we are translating that learning, and what we hear from our customers into our next-generation product. And that’s what we do here. So, D200 is just an outcome of that learning process and what we do at Cabot Microelectronics.

Gertrude Balkgisan – Buckingham Research

Okay. Next, on the aluminum slurries, I kind of missed that comment, what stage of the product development are you in? Is that currently being sold?

Bill Johnson

We are selling products for aluminum CMP today. It is a very small market. It’s being used at very advanced technology, it’s 45 nanometers and smaller. It’s finding its way into high-k metal gate applications and integration schemes within logic devices. We shouldn’t expect after the significant application area, it tends to be one, maybe two CMP polishing passes in the logic device, but we are delighted to be participating in being the leader in aluminum CMP slurries going forward.

Gertrude Balkgisan – Buckingham Research

Okay. And that doesn’t really have any competition from, I don’t know, copper or tungsten applications?

Bill Johnson

We don’t think so.

Gertrude Balkgisan – Buckingham Research

Okay. And then, I guess next on the data storage, how does it switch from hard disk drives to solid state drives affect you?

Bill Johnson

Well, it will certainly affect us. Let me back up on it. Data storage to us, it’s a great example of what we are trying to do with ESF. We did data storage before we did ESF, we were able to penetrate that market very quickly with our existing knowledge of CMP technology. It’s a very small market, there’s only a handful of customers that we supported in data storage, and that technology has been historically very robust for things like servers, server farms, hard disks in desktop computers. They are competing against glass now, the nickel (inaudible) industry has been competing against glass media. And now, solid state media is making a major push. I think I have said this before, I would rather supply the data storage industry than be in it. And we watch those trends very carefully, and we will see where they ultimately end up.

Bill Noglows

But to the extent that technology went away from hard disk drives toward solid state, that’s good news for the CMP slurry side of the business for semiconductor even though it could represent some cannibalization of the data storage business.

Gertrude Balkgisan – Buckingham Research

Okay, great. Thanks for your time.

Bill Johnson

Okay. I would like to augur a little bit more color on a question Avinash Kant has raised about M&A activity. We spent a lot of time during the call talking about our pad – progress on our pad business, but with respect to M&A, maybe helpful to provide a little bit more color on Epoch, we were delighted with the results of Epoch, especially in the fourth quarter. For the fourth quarter, Epoch sales were around $7 million, and for the full year – fiscal year, the portion of the year that we own them, $13 million. We mentioned that they were accretive to the company on a gross profit margin but also on EPS level. They added $0.08 per share to our EPS for the full year and really most of that, or essentially all of that was in the fourth quarter. So, we continue to look for other M&A opportunities but are really delighted with the financial results of the Epoch acquisition.

Amy Ford

Thanks for calling this morning, and thanks for your time and interest in Cabot Microelectronics. We look forward to the next opportunity to speak with you. Bye bye.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect, and everyone have a wonderful day.

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