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24 February 2014

Rubicon grows for a third consecutive quarter, driven by LED general lighting and non-LED mobile applications

Rubicon Technology Inc of Bensenville, IL, USA (which makes monocrystalline sapphire substrates and products for the LED, semiconductor and optical industries) has reported revenue of $41.5m for full-year 2013, down 38% on $67.2m for 2012.

Fiscal Q4/2012 Q1/2013 Q2/2013 Q3/2013 Q4/2013
Revenue $20m $8.3m $10.6m $11.1m $11.5m

However, for the fourth-quarter, although still almost halved from the peak of $20.1m a year ago, revenue was $11.5m, up 3.6% on $11.1m last quarter (rising for a third consecutive quarter).

Overall demand for sapphire continued its rebound with the growing momentum of the general lighting segment of the LED market and demand from non-LED applications for mobile devices (such as the sapphire home button on the iPhone 5S, as well as the sapphire camera lens cover and dual flash now being adopted by more smartphone makers).

Despite this, revenue for finished optical products plus R&D activities was $1.6m, down from $1.9m last quarter due to lower R&D revenue.

Revenue from 2- and 4-inch sapphire core sales was $9.2m, up 28% on $7.2m last quarter. Half of the growth came from another sequential increase in pricing and the other half came from increased volume. Capacity for producing cores has been operating at near full utilization for the past few quarters but, after adding some core fabrication capacity towards the end of Q3, the firm was able to increase volumes, allowing it to fabricate and sell all crystals produced in a given period regardless of the mix of products ordered. “While pricing for 2- and 4-inch cores is still very low compared with historical pricing, the steady rise in price throughout most of 2013 has brought the pricing for 2- and 4-inch cores back to around breakeven levels,” says chief financial officer Bill Weissman.

Higher revenue from cores was largely offset by revenue from wafers dropping from $2.1m last quarter to $800,000. This was due to sales for the sapphire-on-silicon (SoS) market falling from $1.8m to just $500,000. “The lower revenue was due to the excess sapphire inventory and technology changes at our SoS customer,” notes president & CEO Raja Parvez.

Rubicon began increasing utilization of its crystal growth facilities last quarter, and those facilities are now operating at full capacity. Reduced idle plant costs (down from $3.9m last quarter to $3.3m) and higher pricing for 2- and 4-inch core products, offset in part by the impact of lower wafer sales and higher development costs, resulted in an improvement in gross loss of $507,000 (from $6.3m to $5.8m). “The majority of our negative gross margin in 2013 resulted from idle plant costs associated with low utilization of our manufacturing facilities,” notes chief financial officer William Weissman.

Operating expenses were $3.2m, slightly higher than $3.1m last quarter. But, due to the improvement in gross margin, operating loss was cut by about $600,000 sequentially to $9m. On a non-GAAP basis, net loss was $5m, cut from $5.8m last quarter.

Capital expenditure (mostly on PSS infrastructure) is down from $4m last quarter to $1.4m. During the quarter, cash and short-term investments fell only slightly, from $36.6m to $35m (with no debt). “We raised an additional $40m in January through the sale of common stock in order to ensure that we can expand capacity as the market strengthens,” notes Weissman.

“A significant amount of the pressure on earnings continues to come from idled plant cost associated with low utilization, but that is changing,” says Parvez. “We have just completed the re-starting of all of our crystal growth furnaces and we expect to see significant increases in wafer production over the course of this year, which will continue to lower our idle plant costs,” adds Weissman.

“While wafer revenue was low in the fourth quarter, we continued to make good progress on our patterned sapphire substrate (PSS) and polished wafer initiatives,” says Parvez. “We announced the introduction of the PSS product in October and we have already received requests for samples from 16 different customers. In the fourth quarter, we shipped PSS wafers to nine of these customers,” he adds. “Based on the progress we have made in the past quarter, we’re confident in delivering our target PSS revenue of at least $15m in 2014,” Parvez notes.

“We have decided to move into 4-inch wafer sales in addition to selling 4-inch cores for two reasons,” says Parvez. “First, while our plan for offering pattern substrates was primarily focused on the developing 6-inch market, we decided to offer 4-inch PSS, therefore, to increase utilization of the patterning infrastructure until the 6-inch market expands. Second, since we will be polishing 4-inch wafers for internal PSS operation, we decided to offer 4-inch polished wafers in order to increase utilization at our polishing operation in Malaysia, again until the 6-inch demand increases,” he adds.

“We received our first production order of 4-inch polished wafers for the first quarter and expect orders from existing customers of 6-inch LED wafers to begin picking up in the second quarter,” Parvez continues. “We’re also seeing an increased interest among LED chip manufacturers and a possible shift to 6-inch substrates now that their utilization rates are relatively high. I believe that most chip manufacturers that move to a 6-inch platform will likely move directly to purchasing patterned 6-inch wafers as opposed to wafers that are just polished,” he adds. “Wafer revenue growth should accelerate in the back half of the year as we qualify PSS customers, see an increase in 6-inch polished wafer orders from existing customers, and gain market share in 4-inch polished wafers.”

“In the past several quarters we have seen a meaningful improvement in the demand for sapphire, with steady price increases as a result,” Parvez notes. “Based on our conversations with others in the market, we believe that trend will continue this year,” he adds. “The seasonality of the LED backlighting market however has temporarily slowed the growth over the past couple of months, and therefore we expect first quarter pricing for 2- and 4-inch cores to be similar to pricing in the prior quarter. Wafer orders will begin to increase starting in the first quarter and should accelerate during the remainder of the year.”

For first-quarter 2014, Rubicon expects revenue to rise to $13m. Wafer revenue will be a larger proportion of total revenue, but there will be development costs associated with the new wafer orders, which will reduce margins in the near term. However, a reduction in idle plant costs by at least $400,000 (due to running at full utilization in the crystal growth for nearly the entire quarter - ahead of schedule) should offset much of that impact, so operating loss should be similar to Q4/2013.

“I have been to Asia several times already this year, and everyone I have spoken with in the industry expects strong demand this year and believes that the more moderate demand that we have seen so far in the first quarter is due primarily to seasonality,” says Parvez.

“In 2014 we will see continued strengthening of the demand for sapphire from both the LED and mobile device market,” believes Parvez. “Both of these market drivers are in their infancy and we expect very strong growth from these applications for years to come,” he adds.

“We also expect strong growth in our wafer business this year with the positive early feedback on PSS, greater 6-inch adoption, and our move into 4-inch polishing,” Parvez says. “As we move into production volumes, wafer costs will continue to come down,” he adds. “Reduction to the idle plant cost associated with our polishing operations will happen gradually over the course of this year as wafer volumes increase. With the improving factory utilization and pricing improvement, we expect considerable improvement in margins this year,” Parvez continues.

“We also saw some rationalization of the competitive landscape, with a number of new entrants at various parts of the sapphire supply chain exiting the market after recognizing that they could not effectively compete,” notes Parvez.

See related items:

Rubicon selling $28.2m of common stock to fund new-product R&D and capacity expansion

Rubicon launches first commercial large-diameter patterned sapphire substrates for LEDs

Rubicon’s revenue rebounds further, up 4.7% in Q3 to $11.1m

Rubicon's revenue rises 28% in Q2, driven by strengthening LED market

Rubicon’s revenue falls in Q1 as 6” customers reduce inventory

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

Tags: Rubicon Sapphire substrates

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