Welcome to the Cabot Microelectronics First Quarter Fiscal Year 2016 Earnings Call. [Operator Instructions]. I would now like to introduce your host for today’s program, Ms. Trisha Tuntland, Director of Investor Relations. Ma'am you may begin.

Good morning. With me today are David Li, President and CEO, and Bill Johnson, Executive Vice President and CFO. This morning we reported results for our first quarter of full fiscal year 2016, which ended December 31. 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, 2015. We assume no obligation to update any of this forward-looking statements information. Also our prepared remarks this morning referenced non-GAAP financial measures. Our earnings release includes a reconciliation of non-GAAP financial measures. I will now turn the call over to David.

Thanks, Trisha. Good morning everyone and thanks for joining us. This morning we announced solid financial results for our first quarter of fiscal 2016 within a continued soft into semiconductor industry and challenging macroeconomic environment and including a partial quarter impact of our recent acquisition NexPlanar which was completed on October 22, 2015. We discussed these conditions last October when we reported results for our previous quarter and we believe this demand environment was in line with what we were seeing then as well as recent reports by some of our strategic customers and industry analysts. During the quarter we achieved revenue of $100.4, a gross profit margin of 50% of revenue and diluted earnings per share of $0.46 all of which include the impact of the NexPlanar acquisition. Excluding acquisition costs and amortization expense related to NexPlanar our non-GAAP gross profit margin was 51.6% of revenue which is 70 basis points higher than in the same quarter last year and non-GAAP earnings per share were $0.56. On this basis we have now expanded our gross margin year-over-year for five consecutive quarters. Bill will provide more detail on our financial results later in the call. To provide some context on our first quarter results let me first offer some perspectives on the global semiconductor industry environment. Industry reports and comments made recently by some of our strategic customers suggest that current IC inventories in the foundry and logic segments decreased during the December quarter and now are at or slightly below normal seasonal levels. Conversely, some reports suggest that inventories in the memory segment particularly in PC- DRAM are moderate oversupply due to soft end demand. Industry reports suggest that the strong U.S. dollar and volatile macroeconomic conditions may have dampened demand for ICs during the December quarter. Also due…

Thanks, Dave and good morning everyone. Revenue for the first quarter of fiscal 2016 was $100.4 million which represents a 10.3% decrease from the same quarter last year. Our first quarter revenue includes a partial quarter benefit of the NexPlanar acquisition but reflects continued softness in demand within the global semiconductor industry and competitive dynamics within dielectrics and data storage applications which we've previously discussed. Foreign exchange rate changes, primarily the weaker Korean Won and Japanese Yen versus the U.S. dollar produced year-over-year revenue by $1.4 million for the quarter. Drilling down into revenue by product area tungsten slurries contributed 44.2% of total quarterly revenue. Revenue was down 1.6% from the same quarter a year ago reflecting overall soft industry conditions but continued strong demand for our tungsten slurries for advanced applications including 3D memory and FinFET. These applications require additional CMP steps and in particular tungsten which we're confident will continue to drive probable growth for our company. We continue to work closely with strategic customers to support their transitions to these advanced technologies. Dielectrics slurries provided 22.9% of our revenue this quarter with overall sales down 18.3% from the same quarter a year ago. The revenue decreased primarily reflects the loss of lower performing legacy dielectrics business that we began to see in the first quarter of fiscal 2015 which we have previously discussed. As Dave mentioned during the quarter we saw revenue growth from some of our new higher performing dielectric slurry products in conjunction with our transformation of this product area. Sales of slurries for polishing metals other than tungsten including copper, aluminum and barrier represented 16.3% of our total revenue and decreased 17.8% from the same quarter last year. We believe this decrease was primarily due to customer efficiencies and repurposing capacity for the next…

[Operator Instructions]. Your first question comes from the line of Edwin Mok with Needham & Company. Your line is open.

So first question on the gross margin outlook, just to clarify, you said that that is a GAAP gross margin guidance? So if I assume you're going to how this -- that include the amortization expense, [indiscernible] December number imply there is $4 million that we should back out from that guidance for non-GAAP, is that the right way to think about that? And in terms of gross margin trend, how do you think about your gross margin beyond the March quarter?

Edwin, the amortization of intangibles related to NexPlanar is split between cost of goods sold and operating expense. So in the first quarter we had about $0.9 million of amortization related to NexPlanar so that would have had about a 0.9 percentage point impact on gross profit and so for the full year we expect amortization to be related to NexPlanar to be around $5 million but about what 65% of that in COG, so kind of a 0.9% drag on gross margin from GAAP standpoint.

And then Edwin, you know going out beyond this quarter we continue to be confident and strong profitability but there are several moving parts. We’ve talked about our continued confidence in tungsten which we've talked about is kind of above our company gross margin. We also see a lot of growth and pad as we talked about which we've characterized as somewhat below company gross margin. And then this dielectrics transformation which we’re continuing to get traction on which is going also improve our profitability. So a few moving parts there but overall very confident and continued strong profitability.

And then on NexPlanar, your revenue was around $4 millennial last quarter, the run-rate that was kind of roughly or maybe in-line with what you guys reported previously for NexPlanar? Is that just because of the timing of revenue or is it -- I thought that business is growing a lot faster than flattish to what you’ve done before.

Right. So we had a partial quarter benefit this quarter and I do think it was a little sluggish in the near term and if you recall where they focused it's really on the leading edge, they sell to a small number of customer 6 out of 10 leading customers and if you look at what's happening in the industry right now, you know some of the leading edges is a little sluggish and not ramping up as quickly as initially predicted but you know as you can tell from our prepared comments we continue to feel really excited and confident about the future and we talked about growth potential we see in the business in the future around $70 million to $90 million in the next few years. So we’re only one quarter in but the other feedback I would give is that we're getting very good feedback from customers and we’re encouraged by what we see in the pipeline.

And then lastly I think Dave, you mentioned on your prepared remark China grew around 25%? Which area are we seeing growth in China and do we think that can continue to be growth driver for you guys as you guys increase penetration in that market?

It was 25% percent sequentially and you know China is an area where we have traditionally had a very strong position and as you have probably been following there is just a lot of interest in China right, a lot of investments being made by the Chinese government as well as new capacity being put in by customers in Taiwan. Intel is also starting up their dial-in facility. So just a lot of activity in China and I think we're well positioned to grow as China grows overall. So it's kind of an overall strength that we've seen from China so far.

And lastly, sorry just a clarification on your new OpEx guidance, does that include any NexPlanar related or GAAP to non-GAAP -- is that a GAAP or non-GAAP guidance?

Yes that’s a GAAP range, $141 million to $145 million down $2 million versus what we've previously guided.

Our next question comes from the line of Dmitry Silversteyn with Longbow Research. Your line is open.

Couple of questions if I may first of all talking about gross margin, you continue to deliver very nice results there and you’ve taken up your guidance range partially on NexPlanar I'm assuming but partially on continuing good execution. Can you talk about sort of what's driving that over the last, not just this quarter but over the last two, three quarters given that you're volumes are down pretty significantly and I know you're not a high fixed cost manufacturing operation but I would have thought that that would declining volumes -- your margins would have not been quite as strong. If you can put it into sort of big buckets as far as foreign exchange impact versus lower material costs versus this yield improvement that you've talked about?

Sure. So one of the things we've talked about even in a soft industry environment we have had really strong performance in our tungsten CMP slurry area. So for example in fiscal year '15 year-over-year that grew by about 13% even as our overall company revenues were relatively flat and given the strong position in tungsten and strong profitability in that product area that's been a driver of some of the gross profit performance. In addition we’ve talked about foreign exchange and the weak Japanese yen helped us in fiscal '15 I think that was a lift on the order of 100 basis points year over year from '14 to '15. And then we talked about the loss from lower performing dielectrics business there was pretty significant but relatively low margin on that product and so that loss in that business sort of increased the product mix and therefore that drove a bit of gross margin left as well.

Okay. So if I put all of that together with the yen flattening out, probably that benefit is not getting much better in 2016 than it was in 2015 and it sounded like the dielectric sale exit basically anniversary in the December quarter so will not be much of a driver into 2016. The margin drivers for 2016 would that be a continuing growth of tungsten above the growth of other businesses and then savings from NexPlanar is that how should I think about?

There are two things there, Dmitry, as you mention tungsten continues we see a really bright future there with ramp ups of FinFET but not only on the logic and foundry side but on the memory side as customers ramp up 3D that should represent an opportunity for us in tungsten dielectrics and pads, but obviously a strong position in tungsten. And we've talked about this transformation of our dielectrics portfolio and we were really encouraged by what we see with the new products and dielectrics that we have introduced and starting to get some really good traction in the market. So that should also be a driver of profitability as well.

Okay. So David to follow up on that, am I correct from your comments that the exit of the low margin legacy dielectrics is pretty much over this quarter that you just reported as far as the big impact on top line and we should see a more a better performance -- not necessarily growth but certainly more moderate declines in volumes of dielectrics than you've seen in 2015?

Yes that's correct. We first talked about that impact in fact in the first quarter of 2015 fiscal '15 so now we've counterized [ph] that and should see really that all behind us. Even within the reduction in dielectrics revenue with some of the higher performing products we've seen growth but it's just been disguised by sort of the reduction of the revenue on these lower performing legacy products.

So basically starting with the March quarter you should start seeing either reduce negative comps maybe second half of calendar year actually positive comps in that business?

That's correct.

Okay. If I look at your pad revenue excluding the $4 million or so that you got from NexPlanar it looks like your revenues in legacy pads were down about 30% year-over-year. This is the second quarter of this magnitude loss, what's going on there? I mean are we going through a couple of more quarters like this until your anniversary some business loss or customer loss or gain? Just sort of normal quarter to quarter volatility just happens to be two quarters in a row down 30% plus.

Yes Dmitry, you did the math right and it's obviously competitive there. We would say that they're obviously also that to the extent that we have exposure to the foundry area that was pretty soft this quarter and we didn't lose any significant customers but again that's really one of the reasons why we are really excited about the addition of NexPlanar because it really rounds out our pad portfolio and when we see the feedback from customers it really -- it's a growth story for us and as time goes on we will stop referring to NexPlanar start just referring to the overall pads business which we expect to grow to $70 million to $90 million and we're looking at -- what are the synergies between our organic technologies and pads and also with NexPlanar or so it's going to quickly come together over the next several quarters just the combined pad business.

[Operator Instructions]. Our next question comes from the line of Chris Kapsch with BB&T Capital Markets. Your line is open.

Just a follow-up on the pad business and excluding the NexPlanar acquisition contribution and given that you know that year-over-year decline effectively would or your legacy pad products now the D100, D200, so you mentioned the soft foundry conditions which I presumably means fewer pad change outs but has the adoption or incremental process of record wins from those products has that stalled out or do you still have a nice pipeline of POR qualifications for those legacy products and so notwithstanding the tough environment can those legacy products continue to grow over time and over cycles?

We think they can Chris, but obviously we were disappointed by our pads growth in the past and that was one of the reasons why the NexPlanar opportunity was so compelling to us. So again looking forward I think it will be a mix, we see both organic pad opportunities in the pipeline and also NexPlanar. The one thing we talked about with their technology is it's a little bit, it's similar to the incumbents products so to that extent the qualification time you could assume would be a little bit faster than a potentially some of our organic pad offerings that we've had the past.

So what about the qualification pipeline? Is it just completely evaporate or is there still a qualification pipeline for the legacy products is in addition to the NexPlanar pads?

Yes there definitely is and we've talked about it is as strong pipeline but as you know following the company for a while it takes a while to get those pad qualifications in place. Now when we go to customers we’re able to offer them not only our D100, D200 family but also the NexPlanar offering. So we just got a broader suite to offer our customers but you're definitely right that there is a continued pipeline of organic pad opportunities that we’re pursuing.

And then the follow up on just the commercialization of the new oxide slurry, can you sort of maybe update us on what you're thinking of is as the available market there and the success that you're having is it currently more on legacy nodes or advance nodes or is it really a combination thereof and then given the TAM, how much share do you think you can capture?

We’re really, really excited about it Chris and we talked about it last quarter as being able to address about $100 million of business opportunity and we’re not quite ready to give to breakout progress there yet other than to say that we’re really encouraged by what we see on the sales side and then to your question where it's been applied, it's broadly applicable across different technology nodes as well as 200, 300 millimeter applications. So it's broadly applicable to the industry.

And then just a follow up on the tungsten slurries, I get that that the increased polishing steps in FinFET and 3D NAND, can you just talk about -- so I presumably I don’t know if you can discern but the products that you sell into those nodes presumably is still up year-over-year, can you just comment on that and how do you see the production ramp at those advance nodes over the last couple of quarters and looking forward?

Right so we talked about -- actually we gave a number last quarter of around 13% of our tungsten revenue was driven by solutions to -- that go into 3D memory and FinFET--

Was that full year David or was that for--

That was for the full year. So it's becoming a significant part of our business and as you know those technologies are still in the early stage. So quarter to quarter you know that's probably not as relevant as what's the year over year growth but just in a little commentary on the logic and foundry side, I think that the 14, 16 nanometer ramps [ph] are going a little slower than perhaps customers had initially forecasted and 3D NAND continues to kind of be a bright spot. Obviously Samsung is out there ready and HVM production with their facility in Xian, China and other customers are making preparations for ramp. So both of those I still think are in the early stage of ramp up.

Okay, and then just finally if I could one last time on capital allocation. So just on so establishing the dividend that I think that's great, opens up a broader suite of potential investors. But I was curious about the thoughts on the buyback increased the authorization but the cadence looks like it's no greater than it was prior. I'm just wondering what really the intent is? Is there any intent to increase the repurchase cadence given all the circumstances and -- or is it really just a kind of an open authorization that you're going to perpetually just try to prevent [indiscernible]?

So the Board authorized the increase on January 7th. So that was in our second fiscal quarter and we repurchased $10 million of our stock in the first fiscal quarter. Last year we repurchased $40 million and so our first fiscal quarter was on that pace. We haven't ever provided a commentary forward looking on share repurchases projections or outlook that sort of thing but you've seen and I think about four different share repurchase programs but our board has authorized those we've executed those and it's not like we've put our share repurchase program on the shelf and then don't implement it. So we when we've been in the market in the past it's been on the order of $10 million per quarter and you've seen that's been relatively regular but we have not tried to be opportunistic in the past but we do have now $150 million of authorization so a lot of dry powder for share repurchases in the future.

And Chris capital allocation is something we talk about with our Board on a very regular basis

Thank you, Chris. We appreciate your questions this morning. Thank you for your time and your interest Cabot Microelectronics.