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6 August 2008


Sapphire substrate maker Rubicon grows 40% year-on-year

For second-quarter 2008, Rubicon Technology Inc of Franklin Park, IL, USA, which manufactures sapphire substrates and products, has reported revenue of $11.5m, up 10% on last quarter’s $9.5m and up 40% on $8.2m a year ago.

Of total sales, 10% came from optical applications, 60% from LED makers, and 30% from silicon-on-sapphire (SoS) electronics applications. Growth in the latter sector (mainly to Peregrine Semiconductor Corp of San Diego, CA) correspondingly pushed the proportion of total sales from North America up to 44%, with 54% from Asia and just 2% from Europe.

Of total substrate revenue, large diameter products (3-inch or greater) have risen from 42% a year ago and 58% last quarter to 60%. This is due to the increase in 6-inch wafers sold for SoS and the migration of LED makers to larger-diameter substrates.

Silicon-on-sapphire revenue grew 173% year-on-year and 18% sequentially as Peregrine’s products continue to displace conventional solutions (since its SoS technology allows for a very high level of system-on-chip integration for high-frequency RFICs).

Revenue from LED substrates grew 14% year-on-year and 8% sequentially to $6.9m, with market share continuing to expand through both increasing business with existing customers and adding new key customers in Europe, Japan, Taiwan, Korea, and China. Revenue for 2- and 2.5-inch diameter substrates fell 2% year-on-year, to 60% of LED substrate revenue (compared to 65% plus for the general LED market). Reflecting Rubicon’s continued migration to larger-diameter substrates, 3- and 4-inch revenues grew 54% year-on-year, taking more than 50% share of the overall 3- and 4-inch LED substrate market, Parvez reckons.

Operating margin was 15.6%, or 20.3% excluding $544,000 in costs from its secondary offering of shares (up from 11.5% in a year ago and 14.1% last quarter). This was driven by stringent control of operating expenses and gross margin rising from 34.4% a year ago and 36.8% last quarter to 37.6% (reflecting the shift in product mix towards higher-margin large-diameter products). Net income was $2.2m, up from just $232,000 a year ago.

However, customer payments have slowed as a result of tighter cash flow at some key customers as a result of macroeconomic conditions. In particular, in Taiwan and Korea, a reduced rate of growth in cell-phone and small-display applications has affected LED markets. Taiwan and Korea are in early-stage development for large-diameter LED chip production and therefore remain largely focused on small-diameter wafers. Consequently, the rate of growth for LED applications that use 2-inch diameter substrates has slowed in the past quarter. Slower-than-expected growth in Taiwan has increased pressure on pricing for smaller-diameter products as customers strive to increase their market share. Therefore, in response to current market conditions, Rubicon has been adjusting pricing as necessary on smaller-diameter products. President and CEO Raja Parvez says that Rubicon had expected an overall year-on-year decline in average selling price (ASP) of 5%, but it is now looking at 7% ASP declines (virtually all due to 2-inch substrate business).

In 2009, the market in Taiwan and Korea is expected to pick up as demand for high-performance LED applications such as large-area display backlight units and solid-state lighting for general illumination is growing rapidly. LED backlight units are penetrating into the notebook computer and LCD TV market faster than expected, especially since Taiwanese LCD flat-screen display makers AU Optronics and Chi Mei Optoelectronics have entered LED chip making and will start volume production in early 2009 (e.g. with AU recently stating that their goal of adopting LED backlighting for all of their LCD notebook panels by 2011 may be achieved one year earlier). Rubicon is already supplying blank wafers to the polishing companies that are supply finished substrates to them, says Parvez. These applications need larger-diameter sapphire wafer to support the larger chip sizes necessary for higher brightness and also to optimize throughput to reduce cost. Such applications are also being supported by major LED chip makers in Japan, Europe, and North America, says Rubicon.

Rubicon adds that several LED makers have now acquired MOCVD reactors capable of 6-inch epitaxial growth, and it has consequently received orders from multiple LED chip-making customers for 6-inch substrates to support next-generation LED wafer development efforts. Also, a lot of 6-inch back-end processing equipment is already available from the silicon industry, making it more economical for LED makers to migrate to 6-inch substrates. Volume 6-inch production should be seen in 12-18 months, Parvez reckons. “We expect this large-diameter development to ramp as LED makers continue to increase device performance and drive LED costs down to further penetrate lighting applications,” says Parvez.

Likewise, Rubicon recently provided 8-inch sapphire wafers to Peregrine for its next-generation products. RFICs on 8-inch SoS are expected to provide considerable benefits in terms of device performance and lower total cost of ownership. Rubicon expects the SoS market to grow 50% annually over the next several years.

However, a near-term challenge to SoS business is that Peregrine has recently restructured by moving to a fabless business model, selling its internal wafer production facility. It is outsourcing 95% of its wafer production to three external foundry partners. Two of the foundries (in Taiwan and Korea) are being qualified, involving Rubicon’s substrates. However, the initial foundry partner (now in volume production) has also purchased wafers from another supplier. Rubicon therefore believes that Peregrine is beginning to accumulate an inventory of substrates. Rubicon has a contract for the remainder of 2008 that calls for increased volume each quarter, but the situation could impact new SoS orders for early next year. “We believe that Peregrine is addressing the issue in order to have better control over the sapphire procurement in 2009 and beyond,” says Parvez. Peregrine says that Rubicon will continue to be their majority supplier, reports Parvez, who adds that the SoS market should continue to grow at a very significant rate.

“Current macroeconomic conditions are impacting certain segments of the LED market and we must be mindful of the SoS inventory situation,” says Parvez. “However, given the increasing rate of adoption of LEDs in many applications such as large-area screen, backlight units and solid-state lighting and of SoS RFIC products, we expect continued growth,” he adds.

For third-quarter 2008, Rubicon expects revenue to grow 9% to $12.5m. Q3 will be a challenging for gross margin, says chief financial officer Bill Weissman. Due to the current aggressive pricing environment for 2-inch products, gross margin may be slightly lower than the previously forecast 35% (perhaps about 34%). However, the longer-term target of 36-38% is unchanged, with upside to that depending on the timing of adoption of solid-state lighting applications and larger-diameter substrates, says Weissman.

At the end of Q2, order backlog was $27.1m: $24.6m for delivery in 2008 and $2.5m for 2009. “Despite macro-economic conditions impacting a portion of the LED market and some build-up of inventory in the silicon-on-sapphire market, our outlook for the full year 2008 remains unchanged,” says Weissman, i.e. revenue of $47-49m (up 38-44% on 2007’s $34.1m).

Rubicon is therefore continuing its aggressive expansion plan, with furnace installations at its new Bensenville crystal growth facility ahead of schedule, says Parvez. Capital expenditure (CapEx) is on budget, with $6.2m in Q2 bringing it to $10.7m year-to-date as Rubicon also continues to add capacity to post-crystal-growth operations. The firm expects to add $23m in revenue-generating capacity by the end of 2008.

See related items:

Rubicon starts producing 8” sapphire for Peregrine

Rubicon prices follow-on public offering

Rubicon grows 46% year-on-year as expansion runs ahead of schedule

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