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11 November 2015

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

For third-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 $5.3m, down on $7.1m last quarter and $8m a year ago due to weaker sapphire demand.

Fiscal Q3/2014 Q4/2014 Q1/2015 Q2/2015 Q3/2015
Revenue $8m $8.9m $8.9m $7.1m $5.3m

Total revenue for sapphire cores is down from $4.2m a year ago and $4m last quarter to $1.8m. This is due to revenue for 2-inch cores sold into the mobile device market plummeting from $2.6m last quarter to just $0.55m (below the $0.86m a year ago) as a result of higher inventory levels of finished 2-inch double-side-polished wafers (for the mobile device market) at customers.

Revenue from 6-inch cores has fallen back from $0.17m last quarter to just $0.04m. Revenue from 4-inch cores for the LED market was flat on last quarter's $1.2m and down on $3.3m a year ago, as pricing declined further. "This is also likely to be related to excess inventory in the LED supply chain due to reduced demand from the backlighting market," says president & CEO Bill Weissman. "While the LED general lighting market continues to grow, demand for LCD TVs has declined to their lowest levels since the global recession, according to industry analysts at IHS. This has resulted in excess supply of LEDs for the backlighting display market."  

Wafer sales have risen from $1.7m last quarter to $2.1m (roughly level on a year ago). Since revenue for polished wafers has fallen further from $1.8m a year ago and $0.84m last quarter to $0.76m, growth was due mainly to revenue for patterned sapphire substrates (PSS) rising again, from $0.26m a year ago and $0.9m last quarter to $1.4m.

Optical and R&D revenues collectively were roughly level with last quarter at $1.35m (due mainly to optical revenue being down from $1.6m a year ago to $1.1-1.2m). "This market has also been relatively weak in recent quarters, but we are beginning to see some improvement," says chief financial officer Mardel Graffy. "We continue to focus on this business and expect revenue from this market to grow in coming years," he adds. 

"The sapphire market remained very challenging in the third quarter as excess capacity in the market and fluctuations in inventory levels in the supply chain added additional downward pressure on pricing and volumes," comments Weissman. "The current oversupply in the sapphire industry has been driven by the anticipation of the mobile device market potentially converting to the use of sapphire for cover glass in smartphones. While we believe there is a good chance for the use of sapphire in that application, the timing for adoption and scale of that adoption - if it occurs - is uncertain. If sapphire cover glass is adopted on a large-scale, industry analysts suggest that the current excess sapphire capacity will be rapidly absorbed and significant capacity increases will be needed to support that application. While we are taking steps to assure that Rubicon is positioned to participate in the sapphire cover glass market if that application is adopted, we are also taking the actions necessary to diversify the business to reduce volatility [making the company less susceptible to the pricing swings in the bulk sapphire market] and drive stronger margins over the long term," Weissman adds. "Our key initiatives toward that aim include aggressively pursuing our PSS potential, targeting high-margin optical applications and developing new products. Our goal is to focus on products that require more intellectual property to produce, like large-diameter PSS wafers produced entirely in-house and optical products."  

Meanwhile, in the near-term, Rubicon is focusing on cost reduction to reduce cash usage.  Despite idled plant costs rising from $1.6m last quarter to $1.8m, total operating expenses were cut from $3.2m last quarter to $3m due to lower spending on reporting compliance (which last quarter included annual report costs).

Net loss has been cut further, from $9.3m ($0.36 per share) a year ago and $8.6m ($0.33 per share) last quarter to $7.7m ($0.29 per share). Net cash used in operating activities was $1.9m, cut from $5.1m last quarter. During the quarter, cash and short-term investments fell from $36m to $34.1m (with no debt).

However, these non-GAAP figures exclude a $900,000 accrual for the pending settlement of securities litigation, plus a non-cash charge of $39.6m for the impairment of long-lived assets. "Due to the protracted weakness in sapphire pricing, it was determined in the period that our long-lived assets [machinery, equipment, facilities etc] should be written down to current fair market value in accordance with generally accepted accounting principles," notes Graffy.

During the quarter, inventory levels rose by $1m, due mainly to increased work in process (WiP) consisting primarily of boules and cores as a result of the lower core sales.

In fourth-quarter 2015, Rubicon expects the market to be particularly challenging. Given the high inventory levels in the supply chain, demand for 2- and 4-inch cores is weak. At the current pricing, the firm hence plans to limit sales of those products during Q4 to allow time for inventory in the supply chain to clear. "While we expect the market to improve, it is difficult to predict the timing and want to avoid building excess inventory," says Graffy. Rubicon has hence scaled-back crystal growth production further (now operating at 40% of capacity). "We will re-evaluate throughout the remainder of the quarter and look for improvement in demand going into the New Year," he adds.

In addition, Rubicon's key PSS customer has delayed the start of its volume purchase order by a quarter, from 1 October to 1 January (based on revised end-customer demand), reducing wafer revenue in Q4. "The relationship with our customer is strong, and we've agreed to produce PSS wafers for their consignment inventory, so they will be available as needed," says Graffy. Utilization at Rubicon's wafering operations in Malaysia hence increased with the additional PSS volume. "We continue to work on implementing the changes associated with the resource sharing agreement [with a leading sapphire polisher] that we announced last quarter," he notes. "Once the other party begins using a portion of the Malaysia facility, our utilization will increase further. However, some of the depreciation that is currently reflected in idled plant will continue on but will be classified differently," adds Graffy. "Given the current market conditions, the timing of their use of our facility is uncertain. We continue to benefit from the knowledge transfer of their lower-cost polishing process, which was the main driver for entering into this agreement." 

For fourth-quarter 2015, Rubicon's revenue will hence likely be limited to $2-3m. Net loss per share will rise slightly to about $0.30, as the firm will be incurring the cost of producing PSS wafers in advance of recognizing revenue.

"The sapphire market is very challenging at the moment, with weakness in all markets," notes Weissman. "We expect improvement in the first quarter of next year, based on our visibility of PSS wafers sales [for consignment], and we also believe the LED and mobile device supply chain inventories should come down and anticipate some improvement in demand for 2- and 4-inch core in the first quarter," he adds.

"We are taking actions necessary to diversify the business to reduce volatility and drive stronger margins over the long term while putting intense focus on cost reduction to reduce cash usage in the short term," says Weissman. "Reducing the level of cash usage is a top priority, and we believe we will show sustainable improvements in cash flow starting early next year as wafer costs decline and we reduce inventory levels," says Graffy. "Additional improvement is expected later in the year by increasing optical revenue," he adds. "However, given the expected inventory build in the current quarter for the wafer consignment inventory and limited core sales, cash used will be higher in the fourth quarter [back up to the $5m range]… but obviously we expect cash burn to be significantly lower than that going into next year," Graffy continues. 

"Our goal is to drive growth that is more balanced between large-diameter PSS, optical products, bulk crystal like cores and rectangular blocks, and new products," says Weissman. "The bulk crystal will likely continue to be volatile but has significant potential upside if the cover glass application is adopted. The rest of the business should offer good growth opportunities with less volatility and with good margins.

See related items:

Rubicon's revenue falls 20% in Q2, as 2-inch sapphire core sales and pricing hit by weak mobile market

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

Rubicon's revenue grows 11% in Q4

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

Tags: Rubicon Sapphire substrates

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