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27 May 2015

Rubicon's Q1 growth in sapphire revenue for mobile devices balanced by weakness in LED market

For first-quarter 2015, 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 $8.9m, down on $14.3m a year ago and level with last quarter.

Fiscal Q1/2014 Q2/2014 Q3/2014 Q4/2014 Q1/2015
Revenue $14.3m $14.5m $8m $8.9m $8.9m

"The sapphire market continues to be very challenging," says CEO William Weissman. "The market remains in a state of excess supply with fluctuations in demand, resulting in significant price pressure."

Core revenue was $5.1m, less than half of the $11.35m a year ago but up on $4.75m last quarter. This was mostly due to revenue for 2-inch sapphire cores (used primarily in the mobile device market), down from $8.5m a year ago but up from $3.2m last quarter to $4m. However, this growth was offset partly by revenue from 4-inch cores falling (for LEDs) falling further, from $2.85m a year ago and $1.55m last quarter to $1m. "We saw weakness in the LED market and some strengthening in the mobile device market," notes Weissman. "The LED market, which typically strengthened after Chinese New Year, this year remained soft throughout the quarter," he adds.

Wafer revenue was $1.9m, almost doubling from $1.1m a year ago but similar to last quarter. Of this, polished wafer revenue was $1.4m, up from $1m a year ago but roughly level with last quarter. Revenue for patterned sapphire substrates (PSS) has risen just from $0.1m a year ago to about $0.5m (also roughly level with last quarter) but remains limited to qualification levels.

Optical and R&D revenue totaled $1.9m, down slightly on last quarter's $2.2m but up slightly on $1.8m a year ago.

Crystal growth operations continued to run at full capacity, but wafer polishing and patterning operations remain under-utilized. Idle plant costs rose from $1.8m last quarter to $2.2m. However, operating expenses have been cut from $3.2m last quarter to $2.8m (due to lower bad debt expense and a decrease in consulting fees).

Raw material inventory balance declined sequentially by $1.6m, from $14.5m to $12.9m. "In addition to reducing our per-unit cost through our internal raw material process, we have also reduced the total quantities in inventory," says Weissman.

"We are still cycling through old more expensive raw material stock, so the current low cost of our internal raw material production is not yet fully reflected in our statement of operations," says Weissman. "As a result, the cost of raw material and our cost of goods sold is nearly double that of our current raw material production cost. The impact of this on EPS in the first quarter was about $0.03. These costs as well as our raw material inventory balance will continue to come down," he adds.

Despite the sustained raw material cost and the continued weakness in the LED market, net loss has been cut from $10.9m ($0.43 per share) a year ago and $9.4m ($0.36 per share) last quarter to $8.3m ($0.32 per share). Net cash used in operating activities has been cut from $4.5m a year ago to $3.9m. During the quarter, cash and short-term investments fell from $45m to $41m (with no debt).

Rubicon's key objectives for 2015 include aggressively pursuing the potential of its PSS product, targeting high-margin optical applications, and driving down product costs.

"We continue to work on furnace re-designs and process improvement to further reduce cost. We also continue to improve on our proprietary raw material processes to reduce crystal growth cost," says Weissman. "We have now begun to convert our 83kg furnaces to 93kg, which not only produces more material at a nominally incremental cost but also reduces defects, which increases crystal yield. As we did with the conversion of our 31kg furnaces to 35kg, this will be done gradually according to our maintenance schedule," he adds.

"Our patterning operation is cost competitive and our patterning capability is strong," believes Weissman. "The area where we have greatest opportunity to reduce cost and where we must reduce cost is in polished wafers. We need to ensure that the incremental revenue from increasing PSS volumes generates positive cash flow in the near term and provides strong margins as the market improves. Addressing polished wafer cost therefore is a high priority. Over the past several months we have been working on a number of initiatives to reduce these costs, including the development of a new polishing platform. In coming the months we will be able to determine the cost-reduction impact of these initiatives," he adds.

"While we work on reducing polished wafer cost, we are focusing on PSS wafer sales rather than polished wafer sales," says chief financial officer Mardel A. Graffy. During Q1, the firm continued qualifying its large-diameter PSS wafers.

"The general lighting segment of the LED market is still in early stages of adoption and the LED industry is continuing to migrate to larger-diameter substrates," comments Graffy. "We are seeing the LED market begin to pick up and expect increased 4-inch core revenue in the second quarter," says Weissman. For second-quarter 2015, Rubicon expects revenue to be similar to the first quarter. While core sale volumes will likely be higher, 2-inch demand will be limited and pricing will be lower. In addition, PSS revenue will still be limited to qualification volumes. Loss per share is therefore also expected to be similar to Q1, with cost reductions offsetting the additional price pressure.

"While volume PSS orders have certainly been slower in coming than expected, we do have visibility to growing PSS volumes in the second half of the year," notes Weissman. "We believe that we will increase our PSS revenue over the course of this year." Utilization should increase as PSS wafer orders move from qualification to production volumes. "With increased wafer revenue in combination with reducing product costs, we expect a meaningful improvement in operating results by the end of the year," he adds. 

"Continuing to lower product cost is a major focus for us this year. It's our goal to ensure that Rubicon is positioned to drive strong margins when the markets strengthen and to ensure that we are cash flow positive by the end of this year, even as the pricing environment remains difficult," continues Weissman. "While it will be challenging to achieve these goals without some pricing improvement, we will be taking action over the next couple of quarters to reduce costs. This, along with increased PSS volumes, should reduce our cash burn." 

See related items:

Rubicon's revenue grows 11% in Q4

Rubicon's revenue dips in Q3 due to oversupply in 2-inch sapphire  

Rubicon grows for fifth quarter, with 4-6-inch wafers compensating for decline in 2" cores

Rubicon's revenue up 24% in Q1

Tags: Rubicon Sapphire substrates

Visit: www.rubicon-es2.com

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