12 August 2013

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

For second-quarter 2013, 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 $10.6m, down 38% on $17m a year ago but up 28% on $8.3m last quarter due to revenue for 2- and 4-inch core products rising six-fold from $1m to $6m. Growth was driven by the strengthening LED market (with the general lighting segment playing a key role in the increasing demand for LED chips), offset partly by revenue for 6-inch wafers almost halving, from $6.1m in Q1 to $3.2m - most of which was sold to the sapphire-on-silicon (SoS) market - due to high inventory levels at the firm’s two main 6-inch customers resulting in reduced orders.

Fiscal	Q2/2012	Q3/2012	Q4/2012	Q1/2013	Q2/2013
Revenue	$17m	$19.9m	$20m	$8.3m	$10.6m

Rubicon began scaling back crystal growth production in Q1 to reduce boule inventory levels. Utilization of crystal growth facilities is hence currently only 45%. However, the lull in 6-inch sales has led to utilization of the firm’s polishing operations falling to just 10%. Idle plant costs have hence risen from $2.3m to $3.7m (a significant contributor to gross loss almost doubling from $3.4m to $6.4m). “Keeping crystal growth utilization low has allowed us to begin converting boule inventory into cash,” says president & CEO Raja Parvez. “However, the resulting idle capacity is currently having a significant impact on our margin.” The increased mix of smaller-diameter sales, with prices currently below total cost, has resulted in additional pressure on profit margins.

Net loss was $5.9m ($0.26 per share), up from $3.4m ($0.15 per share) last quarter and $1.3m ($0.06 per share) a year ago. Despite this, during the quarter, cash and investments rose from $36m to $41m due to reducing total inventory by $5.8m, aided by strong accounts receivable collections.

Despite the greatly increased shipments, pricing for 2- and 4-inch core products still rose by about 10% in Q2. “This is the first time in two years that sapphire pricing has increased,” notes Parvez. “The strengthening LED market is absorbing the excess global slide of sapphire which has kept sapphire pricing at record lows for the past two years.”

Changes in market pricing are usually reflected in Rubicon’s financial results in the following quarter due to the lead time on customer orders, so changes in market pricing in Q2 will be reflected in Q3’s financial performance. Rubicon reports that demand for 2- and 4-inch core products remains robust, with pricing in Q3 up by at least an extra 10% presenting further evidence of the strengthening market. “While pricing for 2 and 4-inch core is still below our total cost, current market pricing for those products is near breakeven, and we believe we will see the pricing environment for those products continue to improve in the coming quarters,” says Parvez.

Overall demand from the LED market has been improving, driven by increasing adoption of LEDs for general lighting applications. Rubicon expects LED demand to continue to strengthen, given the momentum in the LED general lighting segment. Also, non-LED applications for mobile devices (such as camera lens covers, portions of the face plate to allow for biometrics like fingerprint recognition and smart watches) have the potential to add considerable demand for sapphire next year.

“We expect improvement in 6-inch wafer orders later this year, and we are on schedule to begin offering 4-inch and 6-inch pattered sapphire substrates (PSS) by the end of the year,” Parvez says. “The PSS product will allow us to capture more revenue and margin on the same surface area of sapphire. It could also help facilitate 6-inch adoption among chip manufacturers, as there will be one less process to scale up before migrating to a larger platform,” he adds.

“Based on the large core volumes we are currently shipping, we expect our boule inventory levels to decrease quickly [approaching a more normal level by the end of this year] and anticipate re-engaging idle crystal growth capacity early next year,” says chief financial officer William Weissman. “Utilization of our polishing operations will improve with the strengthening of 6-inch wafer orders and the start of patterned substrate production [which will begin to absorb capacity],” he adds. Capital expenditure was $2.9m in Q2. “We expect to spend $7-10m over the rest of the year, primarily on building our PSS wafer capability, and enhancing our polishing platform to further reduce wafer cost,” forecasts Weissman.

“The LED market will continue to strengthen, and we expect pricing for 2- and 4-inch cores to be higher in the third quarter,” says Weissman. “It will take another quarter or two to see a meaningful improvement in 6-inch wafer orders and there will likely be additional price pressure on that product in the near-term,” he believes. Q3’s revenue is hence expected to be similar to Q2’s.

“Idle plant costs will remain high in the third quarter, but we should see some improvement in profitability with pricing increases for 2- and 4-inch cores and product cost reductions, offset partially by lower 6-inch wafer volumes and pricing,” adds Weissman. Rubicon hence expects loss per share to be cut slightly to $0.20-0.24.

“Clearly, we need to expand the 6-inch wafer user base in order to change the dynamics,” says Parvez. “We are offering wafers with very tight certification at very effective pricing as an additional incentive to chip manufactures contemplating a move to 6-inch,” he adds. “We do believe that we will finally begin to see greater adoption of 6-inch wafers among major LED chip manufacturers within the next year.”

“With the stronger demand from 2- and 4-inch core, we are shipping significant volumes of sapphire while maintaining a low utilization over crystal growth operation. As a result our total inventory levels are declining, contributing to cash flow,” says Parvez. “We expect sales volume of 2- and 4-inch core to remain high throughout the year which should deplete most of our boule inventories by the end of the year,” he adds. “Based on this outlook, we expect to begin increasing utilization of our crystal growth facilities early next year.”

“While we expect another couple of challenging quarter ahead, the improving pricing environment for smaller-diameter products and the expected increase in our factory’s utilization, particularly going into next year, should allow us to significantly improve financial performance,” Parvez concludes.

See related items:

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

Rubicon reports positive third-quarter results

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

Tags: Rubicon Sapphire substrates

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