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15 November 2016

Rubicon's revenue doubles after patterned wafer customer draws down consignment inventory

For third-quarter 2016, 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 $7.1m, more than doubling from $3.5m last quarter and up 34% on $5.3m a year ago.

Fiscal Q3/2015 Q4/2015 Q1/2016 Q2/2016 Q3/2016
Revenue $5.3m $2.5m $4.3m $3.5m $7.1m

Revenue from wafer sales rebounded to $5.5m, more than tripling from $1.8m last quarter (and $2.1m a year ago). This was due mainly to increased orders from a key patterned wafer customer along with that customer drawing down all wafers in consignment inventory. Revenue from patterned sapphire substrates (PSS) was hence $4.5m, more than tripling from about $1.35m both last quarter and a year ago. Revenue from polished wafers was $0.99m, more than doubling from $0.49m last quarter and up 30% on $0.76m a year ago.

Revenue from sapphire core sales fell back from $0.69m last quarter to $0.42m (down from $1.82m a year ago). This was almost entirely from 4-inch cores. Revenue from 2-inch cores was just $3000, compared with $0.55m a year ago. Like last quarter, there was again no revenue 6-inch cores, compared with $40,000 a year ago.

R&D revenue has fallen further, from $0.27m a year ago and $0.11m last quarter to $0.08m. Optical revenue rebounded slightly from $0.9m last quarter to $1.1m (roughly level on a year ago).

Results were impacted by the decision announced on 12 September for the firm's plant in Penang, Malaysia to cease production of patterned sapphire substrates in September, followed (after a transition period for the firm's key customer) by polished wafers at the end of November, and to shut down the facility by the end of 2016. The patterning equipment has been sold, and the firm is seeking buyers for the real estate and remaining equipment. The facility was designed and equipped to produce primarily polished and patterned sapphire substrates for the LED market, and the decision to exit the LED market for the foreseeable future was made in order to focus on the optical and industrial sapphire market for the foreseeable future.

With its exit from the LED and mobile device segments of the sapphire market, Rubicon has excess crystal growth capacity in the USA. It is therefore consolidating operations into its leased space in Bensenville and Franklin Park, IL, involving vacating (by end-December) its largest facility in Batavia, IL (which it owns, and is considering selling). The Batavia plant is a special-purpose facility with extensive enhancements to power and water cooling systems required for crystal growth production. "Our initial focus would be to seek a buyer that is interested in both the building and infrastructure," says Rubicon in a letter to stockholders. The firm is also seeking buyers for some of its crystal growth furnaces. "The timing and amount of proceeds from these activities, as well as the asset sale activities in Malaysia, are difficult to predict," Rubicon adds.

"We had been trying to stay in the LED substrate market by limiting our product offering to 6-inch wafers and working hard to reduce cost to make that product profitable," says the firm. "While we made significant progress on that front, the continual decline of prices has made the prospects of becoming profitable in the LED substrate market unlikely for the foreseeable future," it adds.

"While margin pressure in the LED and mobile device segments of the sapphire market continue to be severe, there remains good margin opportunity in the optical and industrial segments," says CEO Bill Weissman. "The actions we are taking will improve our operating results, strengthen our cash position and allow us to grow in strategic markets that are better aligned with our strengths while offering stronger margin potential," he believes.

One-time charges in the quarter (related to the decision to exit the LED market and close the Malaysia facility) included a $10.2m asset impairment for writing the Malaysia assets down to liquidation value, a write-down of $4m in excess raw material inventory, and $900,000 in accrued severance. In addition, the firm recorded a write-down of $2.3m of excess 2-inch core inventory (which is sold primarily into the mobile device market) and severance of $180,000 for staff reductions in the USA.

Although better than $48.2m ($1.84 per share) a year ago, net loss per share has worsened again from $8.2m ($0.31 per share) last quarter to $24.8m ($0.94 per share). However, net cash used in operating activities has been cut, from $6.6m last quarter to just $0.5m. During the quarter, cash and short-term investments fell further, from $18m last quarter to $16.6m.

Once the Malaysia facility ceases production activities, wafer revenue will significantly decrease, beginning in fourth-quarter 2016, notes Rubicon. Optical revenue over the past three years has been $4.5-7.1m annually.

"However, we anticipate a meaningful improvement in cash flow once these changes are fully implemented," says the firm. Crystal growth operations will be very limited in the near-term as Rubicon plans to use its existing crystal inventory to support optical orders. It also intends to outsource certain finishing steps to third parties in order to reduce staffing, equipment and footprint. Under this new operating model, staffing should be cut to about 40 going into 2017, limiting fixed costs while retaining the knowledge base built up over the past 15 years.

"The optical and industrial sapphire markets are growing with new applications for sapphire emerging and, given our capabilities, we believe we are well positioned in this segment of the market," says Weissman. "In the near term, our scaled-down operations and use of crystal inventory should allow us to significantly improve cash flow." The sale of assets should generate cash to provide more strategic opportunities to build stockholder value in, and perhaps even outside of, the sapphire market, the firm believes. "We will continue to closely monitor the development of the optical and industrial sapphire markets and our new technologies, as well as the broader sapphire market," Weissman concludes.

See related items:

Rubicon closing Malaysia plant by end-2016

Rubicon's revenue falls to $3.5m in Q2

Rubicon's revenue rebounds, driven by 6" patterned sapphire substrates

Rubicon's revenue halves in Q4 due weak demand and delayed ramp-up at PSS wafer customer

Rubicon's Q3 revenue hit by LCD TV backlighting slowdown and customers' excess inventory

Tags: Rubicon Sapphire substrates

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