CMC Materials, Inc.
Q4 2014 Earnings Call Transcript

Published: 23 Oct 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to Cabot Microelectronics Corporation Fourth Quarter and Full Fiscal Year 2014 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). And as a reminder, this conference call may be recorded. I would now like to hand the conference over to Trisha Tuntland, Manager, Investor Relations. Ma’am, you may begin.

[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 fourth quarter and full fiscal year 2014, which ended September 30. 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, 2013. We assume no obligation to update any of this forward looking information. Also our prepared remarks this morning reference non-GAAP financial measures. Our earnings release includes a reconciliation of these non-GAAP financial measures. 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 financial results for fourth quarter and full fiscal year 2014. During the quarter, we achieved record revenue of $116.3 million including record revenue on our tungsten, pads, and aluminum product areas, a gross profit margin of 49.1% of revenue and diluted earnings per share of $0.65. For full fiscal 2014, we reported revenue of $424.7 million reflecting record revenue on our pads, aluminum and advance dielectrics products area but soft demand in our QED Technologies and our data storage product line. We reported a gross profit margin of 47.8% of revenue for the full fiscal year which includes the adverse impact of the $2.1 million asset impairment charge we recorded during the second fiscal quarter and earnings per share of $2.04. Excluding this impairment, non-GAAP gross profit margin was 48.3% and non-GAAP earnings per share was $2.10 for the year. Bill Johnson will provide more detail on our financial results later in the call. Let me start this morning by recapping certain global semiconductor industry trends that we believe affected our CMP consumables business during fiscal 2014. First, as you may recall, we have talked in the past about seasonal trends within our business in tandem with evolving trends within the global semiconductor industry. During our fiscal year, we saw the continued trend of fewer and larger semiconductor companies accounting for a greater portion of capital spending in the industry. And this has continued to reduce the cyclicality of the industry when compared to historical trends. At the same time, the increasing importance of consumer demand versus enterprise based demand for electronics systems has introduced more seasonal shifts in demand around the back-to-school and holiday seasons. This now marks the third consecutive fiscal year in which our CMP consumables business has experienced soft industry demand conditions during the first half of the year followed by stronger demand during the second half. The second trend that impacted the industry during our fiscal year was the continued scaling of semiconductor devices to smaller and smaller geometries. As the industry continues to shrink dimensions leading edge technology node transitions have become significantly more challenging. To respond to these challenges the industry has placed a heightened focus on new transistor and device architectures which in turn is driving greater innovation in fab materials. For example, we’ve seen an increasing emphasis on development and production of advance technologies like High-K, Metal Gate, 3D-NAND and FinFET requiring more highly engineered materials and highly formulated CMP solutions. As such, we’re seeing that many of our new products are becoming more critical to overcoming our customers’ technical and physical obstacles and we remain confident about the role our CMP solutions are likely to play in enabling these leading edge technologies going forward. In response to this technology trend, we continue to focus on advanced technologies driving greater innovation and creating more compelling new value adding CMP solutions for our customers, which we expect will assure our continued success. Now let me provide some general comments on our current conditions we are seeing within the industry. Industry reports suggest that overall IC inventories are generally in line with forecasted IC sales primarily driven by the continuation of positive trends in mobile connectivity and anticipated solid demand for electronics during the holiday season. While consumer reports indicate that the growth rate of high-end smartphones remain strong demand for tablets appears to be slowing a bit due to the transition in demand to larger screen smartphones. Additionally although the contraction of PC demand continues to slow due to some growth in the enterprise sector, consumer demand for PCs continues to be muted. In response to these trends IC manufacturers continue to absolutely manage IC inventory in the supply chain with capacity of leading edge technology nodes at or near full utilization and around 90% utilization for legacy nodes. Let me turn now to company related matters beginning with CMP slurries. We are pleased that our function and aluminum product areas achieved record revenue in the quarter with revenue growth of approximately 13% and 16% respectively compared to the same quarter last year. Additionally, we reported record annual revenue in aluminum and advanced dielectrics with our aluminum revenue growing by 23% compared to fiscal 2013. During the fiscal year we won new business for tungsten, dielectrics, copper and TSV applications including both legacy and advanced node technologies. We believe our more focused approached to R&D and new product development, which we have discussed in the past, contributed to this year’s new product introductions and business wins. In fiscal 2014, we spent approximately $59 million on research and development or approximately 14% of our revenue. We believe this investment in technology is far in excess of any of our competitors and underscores our strong commitment to innovation within the CMP consumable space. Turning to our CMP polishing pads, we were delighted that we are able to re-establish revenue growth in 2014. Our pads product line achieved revenue quarterly and full fiscal year revenue. The fourth quarter was our third consecutive quarter of achieving year-over-year revenue growth. Notably, we grew quarterly revenue by 14% compared to the same quarter last year and annual revenue by approximately 3%. We believe this growth is primarily due to the ramp of business wins we highlighted several quarters ago. During the fiscal year, customers continue to actively sample our pad products for a range of new business opportunities. As a result of this collaboration, our pad products were adopted for a number of applications including advanced node technologies. Our pipeline of new business evaluation is underway with customers, remains at an all time high and our global business teams continue to partner with existing and new customers. We remain confident that our attractive pad value proposition of longer pad life and lower defectivity will enable us to continue the momentum we established during fiscal 2004 as we head into fiscal 2015. Fiscal 2014 was a prolific year for us in terms of customer recognition of our excellent quality systems and supply chain management capabilities. During the year, we were awarded seven supplier excellence awards for our outstanding support, contributions and performance. Most recently during our fourth fiscal quarter, we received Samsung’s Best in Value award, one of only two suppliers to receive the award and the only materials supplier. Earlier in the year, we received Intel’s more prestigious award for suppliers, the Supplier Continuous Quality Improvement or SCQI award for the second consecutive year. These awards recognize our product quality and reliability and our service to our customers and we are honored to be regarded as an elite supplier within our customers’ broader supply chains. We look forward to continuing to build on our strong relationships with our technology leading customers to consistently deliver innovative, high quality, high performing and reliable CMP product and solutions. Now let me provide a few comments on our near term outlook for the overall semiconductor industry. Sentiment regarding near term demand seems somewhat mixed. Certainly industry analysts and some of our strategic customers are forecasting solid demand early in our fiscal year while others are suggesting softer demand conditions. Further, macroeconomic concerns also provide an overlay of uncertainty over the next year. Based on seasonal demand patterns we have seen in the past three fiscal years with softer demand in the first half followed by strong demand in the second half. As we enter fiscal 2015, we expect some seasonal softening of demand in our first fiscal quarter and we are experiencing some of that softening now. Concluding my remarks today technology node progression and new chip architectures continue to introduce new CMP challenges which we believe will represent growth opportunities for our CMP consumables business. We remain focused on supporting our customers by closely collaborating with technology leaders and we intend to continue to develop game changing technology while leveraging our expensive global infrastructure and distinctive experience and expertise in quality systems and supply chain management. Furthermore, we are confident in our ability to execute our strategies and continue to provide value to our shareholders over a range of industry and macroeconomic environments. And with that, I’ll turn the call over to Bill Johnson.

[Bill Johnson:]

Thanks, Bill, and good morning, everyone. Revenue for our fourth quarter of fiscal 2014 was a record $116.3 million which reflects continued strengthening and demand that we saw beginning in the third fiscal quarter. We generated 3.9% revenue growth from our CMP consumables product for semiconductor applications over the same quarter last year. Total revenue for the full fiscal year was $424.7 million. Full year revenue results reflects stronger demand for our products in the second half of the fiscal year after soft industry conditions in the first half. However, lower revenue from QED Technologies which is primarily capital equipment oriented and our data storage product line which is tied to the PC industry primarily drove an overall 2% year-over-year decrease. Foreign exchange rate changes also reduced revenue by $2.4 million primarily due to the weaker Japanese yen versus the U.S. dollar. Drilling down into revenue by product area tungsten slurries contributed 38.7% of total quarterly revenue and we achieved record revenue for the second consecutive quarter. Revenue was up 13.3% from the same quarter a year ago reflecting strong demand from the memory and foundry segments. For the full year, tungsten slurry revenue increased by 4%. Dielectric slurries provided 25.2% of our revenue this quarter with sales down 9.7% from the same quarter a year ago. For the full year, dielectric slurry revenue decreased by 4.1%. The revenue decrease reflects the loss of some low margin legacy ILD business that we mentioned during our call last quarter. However, within dielectrics, revenue from our advanced dielectrics product area achieved year-over-year growth for the third consecutive quarter and record revenue for the full year. Sales of slurries for polishing metals other than tungsten including, copper, aluminum and barrier represented 18.8% of our total revenue and increased 2.8% from the same quarter last year. For the full year, revenue increased by 0.3%. Within this area we achieved record revenue from our aluminum slurry products for both the quarter and full fiscal year with double digit revenue growth on both bases. Sales of polishing pads represented 8.5% of our total revenue for the quarter and increased 14% compared to the same quarter last year. We've now grown our pad revenue year-over-year for three consecutive quarters. Revenue was up by 2.5% for the full year. We achieved record revenue levels for our pads products for both the quarter and full year. Data storage products represented 3.6% of our quarterly revenue. Our data storage revenue was down 15.6% from the same quarter last year and down 13.7% for the full year on continued contraction of PC demand and some business loss as we mentioned last quarter. Finally, revenue from our engineered surface finishes area which includes QED generated 5.2% of our total quarterly sales. Our ESF revenue was down 34.1% from the same quarter last year and down 32.7% for the full year. Volatility in our QED revenue is common given that it’s primarily a capital equipment oriented business. Our gross profit this quarter represented 49.1% of revenue compared to 50.9% in the same quarter last year. Our gross profit percentage decreased primarily due to higher variable manufacturing costs including higher raw material cost partially offset by a higher valued product mix. For the full fiscal year, gross profit represented 47.8% of revenue which includes the adverse effect of the $2.1 million asset impairment charge related to certain manufacturing assets that we recorded during our second fiscal quarter. Excluding the impairment charge, non-GAAP gross profit was 48.3% of revenue. Our full fiscal year 2014 guidance range was 48% to 50% of revenue. Gross profit margin decreased from 49% of revenue in fiscal 2013 primarily due to a higher variable manufacturing cost including higher raw material cost and the asset impairment partially offset by benefits associated with foreign exchange rate changes. For full fiscal year 2015, we expect our gross profit margin to be between 48% and 50% of revenue. Now I’ll turn to operating expenses which include research development and technical, selling and marketing and general and administrative cost. Operating expense this quarter $34.1 million were 3.8% than in the fourth quarter of fiscal 2013. The decrease was primarily due to lower staffing related expenses including incentive compensation cost, partially offset by higher professional fees. For the full year, total operating expenses were $131.3 million which is $4.4 million lower than last year. The decrease was driven by lower staffing related cost including an incentive compensation cost partially offset by higher professional fees. Our guidance range for full fiscal year 2014 was $127 million to $131 million. Looking forward, we expect our operating expenses for full fiscal year 2015 to be within the range of $132 million to $137 million. The expected increase is primarily due to anticipated higher staffing related cost and the midpoint of this range represents a 2.4% increase versus fiscal 2014. Diluted earnings per share were $0.65 this quarter, up from $0.64 in the same quarter last year. Earnings per share increased primarily due to a lower effective tax rate and lower operating expenses partially offset by a lower gross profit margin. Diluted earnings per share for the full year were $2.04 or $2.10 on a non-GAAP basis excluding the asset impairment compared to $2.19 last year. You should note that as we previously disclosed prior year earnings per share were revised to reflect some non-material adjustments compared to our original disclosure. We discussed this in our Form 10-Q for the June quarter and you will see a more complete discussion in our fiscal year 2014 Form 10-K that we expect to file mid-November. We expect our effective tax rate for full fiscal year 2015 to be between 18% and 20% which is lower than 26% in fiscal 2014. Turning now to cash and balance sheet related items, capital investment for the quarter were $2.3 million brining our full year capital spending to $12.6 million below our guidance of approximately $15 million for the year. For full fiscal year 2015, we expect capital spending to be within the range of $10 million to $15 million. Depreciation and amortization expense for the quarter was $5 million. In addition, we purchased $6.4 million of our stock during the quarter and $53 million for the full year. As of the end of the quarter, there was approximately $125 million of authorization remaining in our share repurchase program. We ended the quarter with a cash balance of $284.2 million which is $18.6 million higher than last quarter and $58.1 million higher than last year, and we have $172.8 million of debt outstanding. I’ll conclude my remarks with a few comments on recent sales and order patterns. Historically, our fourth fiscal quarter is seasonally our strongest quarter of the year frequently followed by some seasonal softening end demand in the first quarter of a new fiscal year, and we are seeing some softness now. Examining revenue patterns within the three months of our fourth fiscal quarter we saw a demand for our CMP consumables products increase by about 5% from the average of the three months in our June quarter. As we observed, order for our CMP consumables products received to-date in October that we expect to shift by the end of the month, we see October results trending approximately 4% lower than the average rate over the September quarter. 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.

[Operator:]

Thank you, sir. (Operator Instructions). And our first question comes from Avinash Kant from D. A. Davidson. Your line is open, please go ahead, sir.

[Avinash Kant:]

So one of two questions, of course the first one is that, Bill provided the guidance on the operating expenses for fiscal year ’15. Could he talk a little bit about what kind of revenue assumptions does that target have?

[Bill Noglows:]

Well our longer term goal has been to have operating expenses approximately 30% revenue and we've been around that over throughout history. We don’t guide specifically to revenue. But operating expense goal over time is to get to around 30% of revenue or lower.

[Bill Johnson:]

Avinash, I would remind you that as we start a fiscal year we like most companies we start with a budget and if you’d look back at last year or the year we just completed 2014, we started the year with OpEx guidance of $131 million to $135 million, and I think at the second quarter we reduced our guidance to $127 million to $131 million based on what we were seeing in the market. We started last year expecting more growth and that growth didn’t materialize, and so we managed our OpEx sort of dynamically and we can turn it on and off, and we would expect to manage the company differently 2015 going forward but as we start the year we start with, we start with expectations of growth and success with many of our initiatives and as the year goes on we modify our OpEx accordingly.

[Bill Noglows:]

Also as we described the very, quarter-to-quarter and year-over-year we mentioned operating expenses were lower partially due to lower staffing related cost including incentive compensation cost. So our incentive compensation cost for FY ‘14 are lower than target. And like Bill talks about when we start out with the budget for the next year we tend to budget at a target level so that its largely staffing related cost and incentive comp other cost and that 2.4% increase at the midpoint of the guidance range.

[Avinash Kant:]

Yes, so that's what I was trying to figure out that is it that all of the operating expense increase is commensurate with the revenue growth expectations or that some additional component of the staffing expenses that you expect to be higher in fiscal year '15? Bill Noglows Right, again, we don't guide the revenue and we have a longer term operating expense target but specifically I point to the 2.4% increase in operation expense you can tie that pretty directly to the difference in incentive comp between FY '14 actual and short of the target level assumed in the budget in FY '15.

[Avinash Kant:]

And talking a little bit about the pads business of course look like you grew significantly in the pads business this quarter. And if I look at the sequential growth I think it comes up as roughly 13% or 14% out of that. And I look at one of your key customers, TSMC which also grew kind of with a similar amount. So what I am trying to understand pads is that is all of the growth in pads coming from the existing customers or you actually did selling to some new customers in the quarter? Bill Noglows No, it's a blend, Avinash, we sold to a number of new customers outside of the big customer in Taiwan that, like I said in my prepared comments, where I have decided about the traction we are getting both at the leading edge and with some legacy customers that they have seen the value on our pad. You know this, we have been slugging it out now for a couple of years and we are quite excited to actually see three consecutive quarters of growth in our pads business and it appears we are getting a little bit of traction as we go forward. But to specifically answer your question our guys on the field and the people that manages business look very closely the sales outside of what I would describe the big guys and those are important customers to us as we implement and get our pads in the market sort of component value.

[Avinash Kant:]

So should we take this quarter or with the last two, three quarters you have been seeing some growth as some sign that you are starting to see traction at some of the new customers and that may still lead to some sort of growth in the pads business going forward despite the seasonality? Bill Noglows Yes, we hope so, Avinash. I think we have talked in past quarters about qualifications and work we have been doing with customers and they take a while. And we think what we have seen in the last three quarters is those qualifications are materializing in high volume manufacturing sales for us. And again that process has been a lot longer than we expected it to be and we added this business but we feel confident that our value proposition is significant and not where people are actually making, they are doing the work to make the switch and again it gives us optimism going forward that we would expect and hope for continued growth as we go forward.

[Avinash Kant:]

And final question, Bill. Of course you did talk about actually this month of October being down 4% from the average last quarter. Is it any different than normal seasonality that you expect?

[Bill Noglows:]

Yes, that's about normal seasonality if you look at the last three years and just look at the CMP consumables business, I think in the last three years it's been either a couple of percent or 4% and that the worst about 9%. So that the 4% is relatively normal seasonality within kind of normal noise, but I would point out is that last year at this time we mentioned that where QED was entering the fiscal year '14 with very little backlog of orders, and as we entered fiscal 2015 QED has a pretty healthy backlog going into the year. So that’s the difference.

[Trisha Tuntland:]

Thank you, Avinash. We will take our next question please?

[Operator:]

Thank you. Our next question comes from Jason Ursaner from CJ Securities. Your line is open. Please go head.

[Jason Ursaner:]

Congrats on a solid finish for the year. Just first on revenue, what was the other metals as a percent of sales? I thought, Bill, you mentioned 16% growth year-to-year in the quarter. That was just for aluminum?

[Bill Noglows:]

That's right. The non-tungsten metals was 18.8% of total revenue for the quarter and year-over-year it was up 2.8% but within that category aluminum had a very strong growth.

[Jason Ursaner:]

Okay. And what are you seeing in copper? I guess why wouldn't copper be seen a stronger growth with some of the new architectural features like true silicon vias and that sort of stuff?

[Bill Noglows:]

In copper what we have talked about recently is kind of a transition from legacy products that are pretty sold on those point of view so just alluded a bit by our customers to new more concentrated products and so as we transition customers from these legacy products to the newer or highly concentrated products, we get a increase in gross margin percentage but actual revenue is going down. So it's higher profitability but with a high concentrate, it's not growing revenue. So that's what the offset that overall non-tungsten metals is growing modestly year-over-year. We are seeing pretty strong growth in aluminum but then copper is going down a bit.

[Jason Ursaner:]

Okay. And on the gross margin for dielectrics, you had talked last quarter about the strategy that focused on the advance piece where you get better margin and kind of left some of the older legacy business that was at lower margin side just may be an update on what you are seeing there and whether that strategy is kind of come into fruition?

[Bill Noglows:]

I do remember, I think last quarter I spoke about a piece of business that we had let sort of go away. It was low margin legacy 200 mm dielectrics business. That is in effect we expect that to continue to go through this year and we will see probably about another $10 million of revenue decrease but with the commence rate higher gross margin for that product line family. I think it would be helpful to mention or note that we have introduced a new product back in the summer in July that's targeted at both advanced dielectrics and legacy dielectrics, the product is based on a highly engineered particle system that brings both higher performance and significantly lower cost to our customers in for both legacy and advanced dielectrics applications. That is our response to maintain our success on our gross margins and our position in these markets and that we think with this product we can bring our customer significant value and reduce their cost and compete against some of these functional materials we have seen at the lagging edge, if you will. But so far we have been sampling these products since the summer. The reaction from our customers is very positive. Some of our customers are being very aggressive with this product and we have very high expectations of that product in both advanced dielectrics and legacy dielectrics. So that’s kind of my update. I'm happy to talk more about dielectric --

[Jason Ursaner:]

I mean, I think I appreciate those details. And for the QED business, looking at the gross margin, I think in the past you talked about that business being above corporate average. Have you guys quantified sort of how much above that would be? Just trying to figure out, the gross margins analysis is pretty strong in the quarter and that's including the decline in QED. So just trying to figure out how much of an additional headwind is sort of embedded in that number even though it's pretty good on a reported basis.

[Bill Noglows:]

All right. So the last two fiscal years ‘12 and ‘13 we had successful years of record revenue in QEDs and those kind of revenue levels, yeah the gross margin is somewhat higher than the company average. Not surprisingly when you saw fewer machines revenue comes down and the gross margin falls pretty significantly. And in fact in this last quarter we had one situation where we had developed new product within QED and it was intended for R&D use and then we actually sold that machine to a customer. It was around $1 million of revenue but because that was a developmental machine as we sold it, it carried in cost of goods sold all of the developmental cost. So within our results for the fourth quarter there is about $1 million of revenue from QED that was zero margin and so that kind of pull down the overall company margin for the quarter. But when QED is running well, yes, the gross margin is moderately above average for the company.

[Jason Ursaner:]

That RND machine was with this year's Q4 or last year?

[Bill Noglows:]

This year's Q4.

[Jason Ursaner:]

Okay. And where is backlog for that business heading into next year?

[Bill Noglows:]

It's more than half for the revenue from last year they had $12 million of revenue last year. So it's something greater than $6 million heading into 2015.

[Bill Johnson:]

It's much higher than what we had heading into 2014.

[Bill Noglows:]

Yeah, we had less than a million heading into 2014.

[Jason Ursaner:]

Okay. And given the seasonal pattern for the core business that you talked about with seeing the year soft in the last couple of years, what was the manufacturing activity like for you guys in Q4 just because I know you talked a few of course about the variance you get on the next quarter relative to what you build internally?

[Bill Noglows:]

Yes, I don't know specifically but it seems like activity has been pretty strong given the strong demand level in the fourth fiscal quarter.

[Jason Ursaner:]

Okay. And just last question from me on the polishing pads sort of a follow up on Avinash's question, how should we think about the growth from here? It's absolutely been a nice growth on a percent basis; relative to the overall company though still relatively smaller the category for the last couple of years. So do you see it as just solid above average growth off of the current base or at some point are we still looking for more of a step function change to being a larger business.

[Bill Noglows:]

I think the -- you correctly said it before we were may be little more optimistic about the difficulty of penetrating the pad business and we entered it. I think now we are in a period where it's kind of steady as it goes kind of growth. I think as our team looks forward they see consistent growth expectations on the order that we see probably last three quarters. But I caution it's very difficult to us for us to predict when that customer will make a switch and how long they will take to qualify the pad product. So it's hard for us to actually put our forecast that are meaningful because we do not control the qual, the customers do. But I think we remain optimistic about the value proposition would bring into our pad customers and some of the R&D we are doing on next generation technologies. Again we have said consistently we consider it as the highest potential incremental growth opportunity for our company and we continue to believe that.

[Jason Ursaner:]

Okay great. Appreciate all the details. I’ll jump back in the queue. Thanks guys

[Trisha Tuntland:]

Thanks, Jason. And we’ll take our next question please.

[Operator:]

Thank you, and our next question comes from Edwin Mok from Needham and Company. Your line is open. Please go ahead. Trisha Tuntland Good morning, Edwin.

[Edwin Mok:]

Good morning. Thank you for taking my question. So first is on the tungsten. Looks like you guys have done quite well there continue to grow for the year for the quarter. So I was wondering is that, how much of that is driven by some of this memory device DRAM and NAND shrinking down to the leading actually require more tungsten or how much or just market position and can you kind of give some color on that? Is it more related to memory? Is it more relate to foundry and is it more relate to your market position?

[Bill Noglows:]

No, we think the growth is mostly related to very strong demand from both the memory and foundry segments. I am not sure I can split it our precisely. I think as you know, Edwin, we have a strong position in tungsten we have a great family of products. We secured some new business on a legacy node application during the first quarter of the year and we’re seeing that sales from that. We just continue to enjoy a really robust product family here that meets the customer’s expectations for both performance and price. One of things that we’re watching carefully is the success of the iPhone 6 that it’s clearly exceeded Apple’s expectation when they launched it and they continue to be pretty bullish about the 6 going into the holiday season. That platform has a lot of memory in it and we serve the customers that manufacture that memory. So that's an exciting sort of opportunity for us and we pay attention to that because that – as you know that swings capacity across the supply chains of our customers. But I think the bulk of the growth comes from strong demand from both the memory and foundry segment. Can you split out (inaudible)?

[Edwin Mok:]

Okay, great, that’s helpful actually. And then on the dielectric business and IOD business that you guys (inaudible) $10 million of revenue decrease coming from I guess that piece of business. Are you kind of half way through there I just try to understand how much is that relative to the business? And it seems like your dielectric revenue has been now stable actually inspite of walking away. Is it just because of holding that dielectric or maybe some penetration also that?

[Bill Noglows:]

No, I think its growth in the events dielectric segment, it’s been a little bit slower for us to see that displacement. We’d expect that $10 million reduction had come over the first two quarters of this fiscal year roughly. And as I said earlier, we are in the process of introducing new products to sort of fill that gap. So the strategy has been in the legacy dielectrics business to increase productivity or profitability and not necessarily go after sort of market share and I think we have been successful in that strategy. And with the introduction of this new product, I think we are feeling pretty good about our position in both legacy and advanced dielectric technology.

[Edwin Mok:]

Okay. Good. And then, on the pad. Regarding the pad business, you guys go back and look at the last two years. I remember that customer extending the life of using your pad has actually been unfortunately a negative effect on your business trend. Have you guys seen that subsided already, was that a contributing factor that helped you? And what about pricing? Have you seen any kind of pricing pressures, especially from your competitor? Has that also subsided to help you in the pad or was it all just come from (inaudible)?

[Bill Noglows:]

Well, let's talk about life first. Our customers -- we -- there is customers are not created equal here, so we have some very aggressive let’s call them technology leaders that push technology as far they can push it. In the case of our pads, we have seen some of our customers' push the pad life beyond what we thought it sort of thought they could. And the down side of that is it’s damped into our revenue growth a little bit. The upside is it's really entrenched us as an incumbent supplier because that value proposition is solid and strong and that word gets around in the industry. So it's kind of good marketing and sales for us as well. We are not happy about the slow growth of revenue. But we like the fact that people are really sort of pushing the value proposition of our pad. We think it builds loyalty in the supply chain. On the pricing side, over the last couple years you’ve heard us discuss pricing. And we expected our competitors to be aggressive with price, to try to hold us out of the market, sort of compromise our value proposition with price. That actively has been I would say relatively high over the last couple of years. Can I stand here today and say it's subsiding a little bit. I'm not sure yet. But as I said, you see in our numbers and what we said this morning, we’ve seen three consecutive quarters of growth. And we are not reducing our prices to win that business, we're pricing at market, like we would. So maybe we are at the end of that curve, I'm not calling it, but we are happy to see a little bit of growth, Edwin.

[Edwin Mok:]

Great. And then, last question on just the engineering service group in general and look at the last two years. Actually, on sequential basis, increased in the September quarter, right. And -- but for others there were full-year build lower from last year, right. Is that -- are we in the new comp stabilize or improved level with the improved bookings we kind of expect that business to comp at least have some growth in 2015, maybe CapEx the $24 million number that you did in ‘13?

[Bill Noglows:]

You're right. The sequential growth was pretty significant there. I think our ESF business was up sequentially about 55% on revenue. But it is -- we say this every time, it's a capital equipment oriented business. So really revenue follows a number of machines primarily, that they are able to sell. And so the fourth quarter was a pretty strong quarter. Remember, the fourth quarter of last year was really large, I think around $9 million of revenue. And the ESF business compared to around $6 million or so this quarter. And I mentioned, strong backlog going into fiscal 2015. But it will continue to be a lumpy business. Even with that backlog, the delivery will be over the year. And they'll work to get more orders. But no, I don't think there is stability there, it's just not the nature of that business.

[Edwin Mok:]

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

[Trisha Tuntland:]

Thank you, Edwin.

[Operator:]

Thank you. (Operator Instructions) And our next question comes from Chris Kapsch, Topeka Capital Markets. Your line is open. Please go ahead.

[Trisha Tuntland:]

Good morning, Chris.

[Chris Kapsch:]

Good morning. Have a few questions. Bill Noglows, your commentary about -- appreciate the commentary about the focused R&D approach and that you feel like you -- that gives you competitive advantage, particularly from a standpoint of the absolute R&D spend. I'm just wondering, as that relate to some of your customers or perspective customers at the advanced applications like FinFET and 3D-NAND. Are you seeing like that you're getting -- because of your ability to draw more resources at those challenges, are you getting sort of a disproportionate amount of the collaborations, any sense for your likelihood of sort of disproportionate success at those sorts of applications?

[Bill Noglows:]

Well, I think we might -- that's a great question actually, because I think we get a disproportionate amount of looks. I mean, when people are considering new technologies, they typically come to us. One of the clear advantages we feel we have is our scale. We still think and believe that we are approximately three times larger than our next largest CMP competitor. And remember, we compete against small divisions of very large companies. But when we look at the revenue of those divisions -- and that scale allows us to do joint development with all of the technology leaders. Some of our competitors may choose to work with one or two customers. We work with all of them at different levels of depth of course. But we have the scale and we have the people and the capacity to engage in a number of different joint development activities with the number of different customers. So I think your question is good. I never really thought of it that way. But I do think we get a disproportionate amount of looks at new opportunities. Whether we are successful at them is solely based on how efficiently we execute and how good our technology is. And I think that by refocusing or focusing our technical activity on that just the technology leaders, I think that caused us and enabled us to just bring more horsepower and brain power quite frankly to leading edge applications. And I think we are seeing some lights at the end of the tunnel here on some of these new products that we are brining into the market. So it's a great question. It will play out over the next and certainly in this year. And this new product we talked about we are introducing now and some other new products that are coming out of our pipeline, it's going to play out over the ‘15 fiscal year and into ‘16. So we'll keep a close eye and report out as we go. But we are excited about our progress so far.

[Chris Kapsch:]

Okay. And then, following up on that -- thanks for that. But on the new dielectric product you introduced that addresses legacy and advanced dielectrics, just couple things. One, what is -- how are you positioning and what's the proposition to the customers, is it a cost of ownership proposition or is it simply pricing? And if it's -- assuming its cost of ownership, what's the advantage versus a legacy product? And then, what's the margin profile? I'm just wondering if that -- if you anticipate that will cannibalize some of our products currently being used in advanced dielectric applications.

[Bill Noglows:]

Well, let me answer the first question. The last question first. Typically, in our R&D and our product development, we introduced a new product. It almost exclusively has higher gross margins than the product we would be cannibalizing of our own. It's just part of the way we think about new product introductions and new product strategy. In the case of this particular product, it uses a proprietary highly engineered particle system that enables us and our formulators and scientists has been really innovative here, enables us to use far or less particle in the formulation than some of the competitor materials. And I think as you know, the higher cost component of a CMP slurry out by the micro-aggregate particles that are in that slurry. So our ability to bring this -- and its dilutable at the same time, so we can bring the CMP solution to our customers at significantly lower cost. And what's really exciting about it is the performance is significantly better from a planarity and a removal rate aspect. So we really feel good about this one and think it's a strong offering to both continue to grow and advance dielectrics and cement a really strong position in some of the legacy dielectrics applications.

[Chris Kapsch:]

Sounds good. Could you just -- on the commentary about the quarter, in the order pattern, you talked about the average I guess thus far into October versus the September quarter. I am just wondering how those monthly orders look sequentially during the September quarter, where they lumpy, where they kind of consistent each month?

[Bill Johnson:]

I think they were relatively consistent. And we saw -- when you talked in July about the June quarter, we are expecting strength in the fiscal fourth quarter. And at the time we have the call late July, we said we hadn't seen that upturn yet. And so, then I think it was early August where we really saw the orders increase. And so August and September I guess were probably stronger than July, but not real noticeably.

[Chris Kapsch:]

Got you. And then, just a follow-up on parching out the pad, the acceleration in pad sales. Is this what you are seeing mostly D100 or is D200 contributing here to the sequential increase in pad revenues?

[Bill Noglows:]

Yes, the -- most of the growth is still D100, although D200 is contributing.

[Chris Kapsch:]

Got you. And then, finally, I guess you'll be filing your 10-K soon. I'm just -- I'm assuming as in last year's 10-K that both TSMC and Samsung will be called out as 10% customers. Do you anticipate a third 10% customer?

[Bill Johnson:]

No. Well, I think its -- no. What's kind of interesting to us is, we are going to call out that TSMC will be 22% and Samsung will be 14%, which is little bit higher than last year. I think it just reflects consolidation and (inaudible).

[Chris Kapsch:]

And then -- and the third largest customer didn't quite make the threshold?

[Bill Noglows:]

There is not a 10%, another 10% customer we had disclosed. But for both TSMC and Samsung, both of those have increased over time. In 2012, TSMC was 18% then 21% the next year and now 22%. And likewise, Samsung has been 13% for couple of years and now up to 14%. So we are happy with the strong position with both of those customers.

[Chris Kapsch:]

Okay. Thanks guys.

[Trisha Tuntland:]

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

[Operator:]

Ladies and gentleman, thanks for participating in today's conference. This concludes our program. You may all disconnect. And have a wonderful day.