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12 November 2014

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

For third-quarter 2014, 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 $8m (at the bottom of the $8-12m guidance range), down by $6.5m on $14.5m last quarter (following five consecutive quarters of growth).

Fiscal Q3/2013 Q4/2013 Q1/2014 Q2/2014 Q3/2014
Revenue $11.1m $11.5m $14.3m $14.5m $8m

This is mainly due to revenue for 2-inch cores plummeting by $5.5m (from $6.4m to $0.85m, down on $6.8m a year ago), while 4-inch rose slightly (from $3.2m to $3.3m, up on just $0.3m a year ago). Revenue for polished wafers fell from $2.6m to $1.8m. Revenue from patterned sapphire substrate (PSS) wafers remained just $0.25m (although almost double the $0.13m a year ago).

“Although the pricing environment improved in the first half of the year, the excess supply of 2-inch in the third quarter drove pricing for 2-inch core 30% lower than the previous quarter,” says interim CEO & chief financial officer William Weissman. With the LED market migrating from 2-inch to 4-inch substrates, much of the remaining 2-inch demand is coming from the mobile device market. “While usage of 2-inch material for the mobile device market continued to grow in the third quarter, that demand was largely satisfied by the considerable inventory of 2-inch material in the supply chain,” says Weissman. “In addition, there has obviously been capacity added in the marketplace this year to serve the mobile device market,” he adds. “As a result, there were limited opportunities to sell 2-inch material in the quarter. However, we are seeing a meaningful increase in 2-inch orders in the fourth quarter [as inventory levels of 2-inch material in the supply chain have now been significantly reduced].”

Nevertheless, despite the drop in revenue, non-GAAP loss was cut from $10m ($0.39 per share) to $9.3m ($0.36 per share, better than the guidance of $0.39-0.44, due to a combination of reduced product costs and product mix).

However, this excludes $4.4m in non-cash charges, including $2.6m related to writing down consumables and equipment that became obsolete with changes made to Rubicon’s wafer polishing platform. The firm expects to recover that amount through the corresponding reduction in wafer costs by the end of 2015. In addition, $1.8m of finished goods inventory was written down as changes in customer specifications made it unlikely to be able to realize the full inventory value.

For fourth-quarter 2014, Rubicon expects GAAP loss per share to be $0.38-0.42. While the firm expects a continued reduction in product costs, Q4 will be impacted by the reduced core pricing and product mix. However, with inventory levels of 2-inch material in the supply chain declining, Rubicon hopes to see improvement in 2-inch material pricing in first-quarter 2015.

“While we are seeing increasing interest in 2-inch material in the fourth quarter, 4-inch demand is very weak due to seasonality in the LED market,” says Weissman. “While the general lighting segment is growing steadily, the backlighting market continues to represent a large portion of overall LED demand and that segment continues to experience seasonality, with the fourth quarter typically being the weakest quarter,” he adds. “This year, the seasonality is more impactful because of a higher level of inventory in the supply chain.” As a result, Rubicon expects fourth-quarter revenue to be similar to Q3 but then to begin improving in first-quarter 2015, with a recovery in the 4-inch market along with continued growth in wafer business.

Rubicon expects continued progress in fourth-quarter 2014 in growing the wafer business, particularly with patterned sapphire substrate (PSS) wafers. ”We are now qualifying with nearly all of the world’s top-tier LED chip manufacturers,” says Weissman. “The size of the orders from certain customers will begin to increase over the next six months as we progress from initial qualification toward full qualification with those customers,” he adds. “We expect production orders by mid next year and, based on the progress we are making, we believe that our PSS capacity should be fully utilized by the end of next year.”

“The shift from 2-inch to 4-inch this past year has been dramatic, and we are now seeing more interest in 6-inch wafers and are providing 6-inch polished and 6-inch PSS wafers to several different chip manufacturers that currently do not use 6-inch wafers in production,” says Weissman. “While current low-cost performance wafers could delay 6-inch adoption for some of these customers, we expect one or two to move into production on 6-inch next year,” he adds. “To our knowledge, we remain the only vertically integrated sapphire producer with volume 6-inch PSS capability, and volume 6-inch polished wafer capability,” notes Weissman.

“The outlook for commercial sapphire remains very bright, with strong growth expected from both the LED and mobile device markets,” says Weissman. “However, the sapphire market remains a relatively young industry with new applications, seasonality and changes in the competitive landscape. Like other advanced materials industries, as the industry matures, the industry leaders will be companies with scale, but more importantly with the strongest capability in terms of vertical integration,” he adds. “While the build-out of our vertical integration model is costly in the near-term, we believe it will position us well to continue to innovate and capture significant market share in the evolving LED market.”

“Our margins will improve with increasing volume and experience in our new product lines and as customer specifications become better defined,” reckons Weissman. “We will also reduce our idle plant cost and our wafer product cost,” he adds. “We continue to carry a high idle plant cost associated with low utilization of our wafer operations.” Rubicon expects to see considerable improvement in this next year, particularly in second-half 2015.

In crystal growth, Rubicon is in the process of slightly modifying the geometry of its boules, which is increasing yield and hence reducing crystal cost. This modification will be implemented in all of its furnaces over the next 12-18 months. The firm is also continuing to lower its raw material cost in crystal growth. “The current low cost of our raw material production is not yet fully reflected in our statement of operations,” remarks Weissman. “Back at the prior market peak, we were concerned about a potential bottleneck in the raw material part of the supply chain, and we accumulated a significant inventory of the material that we used at that time… that material continues to flow through our production. 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… Those costs, as well as our raw material inventory balance, will come down,” Weissman believes. “We made progress in the quarter in reducing polished wafer cost, through some changes in the consumable formula and upgrading some equipment. We are also working on some more significant changes to our polishing platform which, if successful, would significantly reduce wafer cost and require minimal additional capital expenditure. Polishing is the area where we have the greatest opportunity to reduce cost, and an area where we must reduce cost, in order to fully realize the benefit of our vertical integration strategy,” Weissman concludes.

See related items:

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

Rubicon's revenue up 24% in Q1

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

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

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

Tags: Rubicon Sapphire substrates

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