Cabot Microelectronics Corp. (CCMP)

F3Q10 2010 Earnings Conference Call

July 22, 2010 10:00 AM ET

Executives

Amy Ford – Director, IR

Bill Noglows – Chairman, President and CEO

Bill Johnson – VP and CFO

Analysts

Steve O'Rourke – Deutsche Bank

Dmitry Silversteyn – Longbow Research

Avinash Kant – D.A. Davidson & Company

Chris Kapsch – BDR Research Group

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Cabot Microelectronics' Earnings Conference Call. My name is Alicia and I'll be your operator for today. (Operator Instructions) I would now like to turn the conference over to your host for today, 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. Earlier, we reported results for our third quarter of fiscal year 2010, which ended June 30 th. A copy of our Press Release is available in the Investor Relation section of our website, cabotcmp.com, or by calling our Investor Relation office at 630-499-2600.

Today's conference call is being recorded and will be archived for four weeks on our website. The script of this morning's formal comments will also be available there. In addition, I'd like to remind you that we held an Investor Day event in June and the presentation and webcast from that event are also available in the Investor Relation section of our website. These items provide a wealth of updated company and industry information.

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 second quarter of fiscal 2010 ended March 31, and Form 10-K for the fiscal year ended September 30, 2009. 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. This morning we reported our third consecutive record revenue, totaling $101.7 million which represents the first time our company has exceeded $100 million in quarterly revenue. Additionally, we reported gross profit margin of 49.1% of revenue. Reflecting solid utilization of our manufacturing capacity, successful execution of productivity initiatives, disciplined pricing strategy and continued growth in our CMP pad business.

For the quarter, we reported EPS of $0.43, which includes higher operating expenses which we pre-announced last week. The increase in operating expenses was primarily driven by higher cost related to our patent enforcement litigation with DuPont Air Products NanoMaterials or DA NanoMaterials, in which the validity of our patents was upheld.

As we consider the current semiconductor industry outlook, we are seeing a number of continued positive signs. Near-term outlooks provided by our global customers remain strong. There is evidence of corporate IT spending increasing, semiconductor inventories are at low to normal levels, and we are entering a seasonally strong period of the year.

In our view, the current bottleneck on near-term industry growth is our customer's ability to add capacity to meet current and future demand. We believe that our customer's production capacity is operating at very high utilization levels and they are optimizing current capacity as much as possible. That said, our customers are reacting swiftly and we are seeing new capacity additions come online at certain customers and expect this trend to continue and to accelerate into 2011.

Addressing company related matters; we spend approximately $50 million a year on R&D and technical support to maintain our technology leadership. Through these investments, we have created a solid pipeline of innovative new or improved products, and we have built a strong intellectual property portfolio of approximately 750 patents worldwide.

Recently we completed a jury trial in connection with our patent enforcement litigation against DA NanoMaterials. We were pleased that the validity of all of our patents at issue was upheld. These are foundational patents in the field of Tungsten CMP other CMP polishing applications. This is important because we believe the rigorous testing of these patents to the U.S. judicial process has increased the strength of our intellectual property and our ability to enforce the IP worldwide. However, we were disappointed that the jury did not find the DA NanoMaterials product at issue in the case infringed on our patents. And we are considering an appeal of the jury's verdict on this point.

Non-withstanding this patent enforcement litigation, we expect our Tungsten business to remain strong. And we believe that our customers fully6 understand and appreciate the value we bring to them with our products, which provide consistent reliable performance, day-after-day, year-after-year.

Our experience with Tungsten industry is unmatched in the industry and our products are backed with our worldwide technical support, supply chain and quality infrastructure.

Turning now to progress on our operations excellence initiative, we continue to achieve strong gross profit margin performance this quarter. Our ongoing efforts to improve productivity and drive out variation throughout our operations had contributed to our strong performance.

As discussed at our Investor Day last month, we are on track to achieve a record level of productivity improvement in fiscal 2010. And over the past six years, our product variation has been reduced by more than 90%.

In addition, we believe we are achieving differentiation through a robust quality and supply chain management and our customers continue to recognize our strong operational performance by selecting us for their supplier awards. In May, we were one of only 17 companies out of thousands of suppliers to UMC to be honored with its Outstanding Supplier award for 2009.

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