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25 February 2013

Rubicon’s 6" sapphire sales growth for LEDs offsets drop for SoS and low pricing for 2-4" cores

For fourth-quarter 2012, Rubicon Technology Inc of Bensenville, IL, USA, which makes monocrystalline sapphire substrates and products for the LED, RFIC, semiconductor and optical industries, has reported revenue of $20m, up slightly on $19.9m last quarter and $19.4m a year ago.

Fiscal Q4/2011 Q1/2012 Q2/2012 Q3/2012 Q4/2012
Revenue $19.4m $10m $17m $19.9m $20m

In particular, revenue from 6” wafer sales showed another sequential rise, up 7% from $16.4m last quarter to $17.5m (88% of total revenue), driven by increased orders from the firm’s largest LED customer, partially offset by a sequential decrease in revenue from the silicon-on-sapphire (SoS) market.

“We saw strong demand for 6” polished wafers from the LED market, with 6” wafer revenue from that market increasing to $10.5m from $7.7m last quarter,” says president & CEO Raja Parvez. 6” revenue from the SoS market fell from $8.7m last quarter to at $7m. “We saw only a slight sequential reduction in average pricing for 6” wafers in the quarter,” Parvez notes. “We continue to be the largest provider of 6” polished wafers in the market due to our strength in both large-diameter crystal growth and large-diameter polishing, evidenced by the fact that we have now shipped over 400,000 polished 6” wafers to date into the LED and SoS markets,” he adds.

Due to low industry pricing for 2-4” core products, the firm decided not to sell those products in the third and fourth quarters, with just a few exceptions, yielding revenue of just $1.3m in Q3 and $337,000 in Q4.

However, while the pricing environment has not improved for 2-4” core products, the firm has started taking orders for delivery in Q1 and Q2/2013 in order to begin reducing inventory levels and maintain customer relationships. Due to resuming sales into this market, pricing has decreased further. “Current pricing of 2-4” core products is now below our carrying cost in finished goods and WIP [work-in-process] inventory for those products,” says chief financial officer William Weissman. “As a result, we recorded a $1.6m adjustment in the period to reflect the value of those products in inventory at the current market price,” he adds. “We believe that our competitors are now selling smaller-diameter cores at cash cost in order to reduce inventory or to keep utilization rates high. However, excess capacity in the market is gradually being absorbed and we believe the pricing environment should eventually improve.”

Gross margin has fallen from 12.3% last quarter to 5%, due mainly to the decline in smaller-diameter core pricing as well as lower utilization rates and the slightly lower 6” pricing.

Net loss was $1.1m ($0.05 per diluted share), compared to net income of $272,000 ($0.01 per diluted share) last quarter, due mainly to the lower smaller-diameter core pricing and corresponding inventory adjustment. However, cash and short-term investments were maintained during the quarter at $44m, with no debt.

“With the accelerating growth of the general lighting sector of the LED market and with the increasing complexity of mobile devices creating greater opportunity for SoS technology, I am very excited by the longer-term growth potential of the markets we serve,” says Parvez. “However, they are evolving markets and we will likely continue to see shorter-term volatility… with cyclicality impacting orders from both our two largest 6” wafer customers,” he cautions. “In the first quarter, our 6” wafer orders will be lower. Similar to what we experienced last year, our largest LED customer for 6” wafers has excess inventory and will not likely need additional material until the second quarter. Also, our SoS customer recently announced that their orders are down, based on weaker-than-expected sales by a key end-customer.” 

For first-quarter 2013, Rubicon hence expects revenue to slump to about $8m (although 6” should still be more than half of revenue). Utilization rates will be low in both crystal growth and polishing, putting pressure on margins. This will be compounded by the moving remaining polishing operations to Malaysia, causing some temporary redundancy. Consequently, the firm expects a loss per share of $0.10-0.14.

Most inventory is in raw material and boule inventory. “We continue to refine our new raw material preparation process and are now taking delivery on the equipment needed to expand that capability to support most of our crystal growth operation with internally processed raw material. This will result in a significant reduction in our raw material costs, which is a major component of our crystal growth costs,” says Parvez. “Our safety stock of raw material is now more than sufficient and our commitments to purchase additional material are complete. So we will now be drawing down the raw material stock,” he adds.

Rubicon has also decided to further scale back its crystal growth production temporarily to reduce boule inventory levels. Total inventory levels should hence begin to decline (starting in Q2).

“Projects like our in-house raw material production and the continued move of our polishing operation to Malaysia will significantly reduce our costs once completed this year and further enhance our competitive advantage,” reckons Parvez. US headcount has been cut by about a third. “Our vertical integration is a real differentiator in the market and allows us to better control quality and costs and provide assurance to our customers that their orders will be delivered on time and with consistent quality,” he adds.

Also, capital expenditure requirements are limited this year, with the exception of investment in patterned sapphire substrate production. CapEx for full-year 2013 is likely be $10-15m, with a little over half going towards the PSS (patterned sapphire substrate) initiative.

“We continue to focus on enhancing our existing platform and developing new products,” says Parvez. “We will be extending the vertical integration this year by completing the build-out of an internal wafer patterning capability and will be introducing large-diameter patterned substrate to the LED market,” he adds.

“The markets we serve are young, are evolving and will likely continue to see volatility. However, by focusing on reducing costs and evolving our products through technology, we intend to maintain our market leadership role and position the company to capitalize on market conditions when they later change.”

Rubicon’s SoS customer has expressed confidence in a strong second-half 2013. “Our SoS customers is extremely well-positioned to capture market share for switches in the latest-model more advanced smartphones to be introduced later this year,” reckons Parvez. “We believe the markets we serve will strengthen throughout the year, with 6” orders in particular being much stronger in the second half [from both the SoS and LED markets]. In the LED market, the general lighting segment is expected to drive strong growth later in the year,” he adds. “Pricing for 2-4” cores will remain weak in the near term, but as the LED market strengthens we believe pricing will eventually improve, as current pricing levels are not sustainable in our opinion.”

See related items:

Rubicon reports positive third-quarter results

Rubicon’s revenue rebounds in Q2, driven by 6” sapphire sales

Rubicon’s revenue halves to $10m in Q1, but rebound expected in Q2

Tags: Rubicon Sapphire substrates


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