16 February 2015

Rubicon's revenue grows 11% in Q4

For fourth-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 $8.9m, down 22.6% on $11.5m a year ago but up 11% on $8m last quarter.

Fiscal	Q4/2013	Q1/2014	Q2/2014	Q3/2014	Q4/2014
Revenue	$11.5m	$14.3m	$14.5m	$8m	$8.9m

Revenue from sapphire cores was $4.7m, almost halving from $9.2m a year ago but rebounding from the sudden dip to $4.2m last quarter. In particular, revenue for 2-inch cores (used primarily in the mobile device market and the China LED market) was $3.2m, down on $8.2m a year ago but up on the low of $0.85m last quarter (which had been hit by excess inventory in the supply chain). However, the increased demand was not strong enough to improve 2-inch pricing, which remained at an all-time low. Growth in 2-inch was offset partly by revenue from 4-inch cores (used almost exclusively in the LED market) up on $1.1m a year ago but more than halving from $3.3m last quarter to $1.6m, impacted by seasonality in the backlighting segment (still a significant portion of LED demand) as well as the Chinese New Year.

Wafer revenue was $2m, similar to last quarter. In particular, there was growth for 6-inch polished wafers and patterned sapphire substrate (PSS, doubling from $0.25m last quarter to $0.5m), due to continued progress with customer qualification (particularly for 6-inch). This offset a drop in revenue from 4-inch polished wafers (due to the LED backlighting seasonality). Overall polished wafer revenue (4-inch and 6-inch) fell from $1.8m to $1.5m (although still up on $0.6m a year ago).

Revenues from optical products and R&D totaled $2.2m, up on $1.8m last quarter due to higher volumes from current customers in commercial and defense markets and from new parts reaching production volumes for several optical applications. Specifically, revenue from 'optical and other' rose from $1.6m to $2m, while R&D revenue fell slightly from $0.16m to $0.14m.

Operating expenses were $3.2m, level with a year ago but cut from $4.4m last quarter (which had been inflated by severance costs and loss on disposal of assets).

On a non-GAAP basis, net loss was $9.4m ($0.36 per share), roughly level with last quarter. During the quarter, cash and short-term investments fell from $53.2m to $45m (with no debt).

"The current low cost of our internal raw material production is not yet fully reflected in our statement of operations," notes president & CEO William Weissman. "Back at the prior market peak, we were concerned about the potential bottleneck in the raw material part of the supply chain and we accumulated significant inventory… 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 costs. The impact of this on EPS in the fourth quarter was around $0.03 per share and, over time, those costs will come down as well as our raw material inventory balances," he adds.

"The area where we have the greatest opportunity to reduce cost and where we must reduce cost is in polishing," says Weissman. "Over the past several months, we've been working on the development of the new polishing platform and expect to have the development completed in the second quarter. Early result suggests the new process should yield a significant reduction in cost, while providing greater capability in controlling flatness and other characteristics in the wafers." 

While sapphire prices increased in first-half 2014 for the first time in two years (indicating that supply was finally beginning to tighten), pricing in second-half 2014 was driven down by fluctuations in demand and excess inventory in the supply chain rather than an increase in supply. More recently, pricing has come under further pressure due to the significant weakening of the ruble and yen, favoring competitors in Russia and Japan.

"There remains enormous opportunity ahead for Rubicon as the LED market finally begins the transition to larger substrates [due to the growing adoption of LED lighting] and new and exciting applications in the mobile device and optical markets open up," comments Weissman. "However, the sapphire market remains challenging at the moment, with continued pricing pressure and fluctuations in demand. We expect to sell higher volumes [for 2-inch] and to begin driving down product costs in first-quarter 2015, but price reductions will minimize the impact."

For first-quarter 2015, Rubicon hence expects revenue and EPS to be similar to the previous quarter. "The first quarter is always affected by the Chinese New Year," notes chief financial officer Mardel Graffy. "We expect demand for 4-inch to improve after Chinese New Year; given that the holiday is a bit later this year, we will not likely see much improvement until the second quarter," he adds. Core volumes will likely be higher, however average pricing will be lower. "We expect to make progress on cost reduction in the quarter, but the impact of these changes may be offset by price reductions resulting from the currency fluctuations," says Graffy. 6-inch polished wafer orders with one key customer will be lower, but should resume again in the second quarter.

"We are beginning to see some growth in PSS revenue and expect that to continue to build, particularly in the second half of the year," says Graffy. "Our patterning operation also leads the industry in capability and cost," believes Weissman. Rubicon continues to be the only third-party provider with high-volume 6-inch patterning capability. "We believe we're working with the key 6-inch customers and prospects and that our revenue ramp depends on timing of when customers move to a 6-inch platform or begin to purchase 6-inch PSS from an external vendor," says Weissman. "We are working with several customers that currently have internal 6-inch patterning capability and are now considering purchasing patterned 6-inch wafers rather than adding further internal capacity," he adds. "We have a customer that has firm plans to move to production on 6-inch PSS this year. They have provided us with a forecasted rough schedule that has the potential to use up to 30% of our capacity by the end of the year," Weissman notes. "We continue to work hard to penetrate the more established 4-inch PSS market to gain share. We are making progress with some key accounts and expect volumes to pick up in the second half of the year. For PSS, our goal remains to fully utilize our existing capacity by year-end," he notes. 

"We are putting our greater focus on the optical market for new and existing products, and expect continued growth from this market," says Graffy. "We're increasing our business and technology development efforts in the optical markets for aerospace, defense and industrial applications as well as in the consumer electronics market," adds Weissman. "Our focus will be large-sized sapphire windows, high-value-added fabricated sapphire piece and parts and lower-cost sapphire products for high-volume applications." 

Key objectives for 2015 are therefore aggressively pursuing the potential of the firm's PSS product, targeting high-margin optical applications and driving down product costs. "We are taking action to position Rubicon to drive strong margins when the market strengthens and also ensure that we are cash flow positive by the end of this year even if we do not see a meaningful improvement in the pricing environment [i.e. during downturns in the market, given its unpredictability]," says Weissman. "That requires product cost reductions, particularly in our wafer products and increased wafer volumes," he adds. "Regarding wafer volumes based on our sales activity for polished and PSS wafers, I'm confident that our wafer volumes will increase throughout the year. Regarding product cost, I believe our crystal has the best quality in the market and that our crystal growth costs are among the lowest in the industry. Even so, we continue to work on furnace design changes and process improvements to further reduce costs. We also continue to lower our raw material cost in crystal growth," Weissman continues. "We expect that actions we are taking now will result in a significant improvement in both revenue and earnings by the end of the year."

See related items:

Rubicon's interim president & CEO made permanent; VP - financial operations becomes CFO

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

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

Tags: Rubicon Sapphire substrates

Visit: www.rubicon-es2.com