24 February 2012

Rubicon’s revenue falls 42% in Q4 after LED makers delay 6” transition

Rubicon Technology Inc of Bensenville, IL, USA, which makes monocrystalline sapphire substrates and products for the LED, RFIC, semiconductor and optical industries, says that its full-year revenue rose from $77.4m in 2010 to $134m in 2011. However, in fourth-quarter 2011 revenue was $19.4m, slightly below the guidance range (given in November) of $20-23m, and down 34% on $29.5m a year ago and down 42% on $33.6m in Q3/2011. “Demand was limited, for both sapphire wafers and cores, because of excess inventory in the LED supply chain,” notes president & CEO Raja Parvez.

In early February, Rubicon signed a new agreement (worth $20m) for 6” polished wafers with its key customer [which accounts for 60% of total revenue] that outlines a base level of shipments from June through December (the previous agreement expired in December). However, due to the challenging market conditions, in Q4 Rubicon reduced the volumes and pricing requirements under the customer’s previous contract. It also provided accommodations to some other key customers of its 2-4” cores, and consequently wrote off $1.7m of accounts receivable in Q4. “We have worked very closely with our major customers to help them through this challenging period and to ensure that our relationships remain strong and mutually beneficial,” Parvez comments.

Impacted by the reductions in pricing (with the average selling price of its 6” wafers down 30% in Q4) as well as lower capacity utilization for the firm’s fabrication and polishing operations (with utilization of the wafer polishing facility in Malaysia just 20%), gross margin has fallen from 48% in Q3 to just 12.1% (well below the guidance range of low- to mid-30%).

Net income has fallen from $15.4m ($0.64 per diluted share) a year ago and $8.2m ($0.35 per diluted share) in Q3 to just $861,000 ($0.04 per diluted share, below the expected $0.07-0.10). However, this includes income of $1.7m from a reduction in the full-year tax rate to 30.3%. Excluding that shows an underlying operating loss of $0.7m. During the quarter, cash and short-term investments fell further, from $72.6m to $55m.

“We are seeing signs of improvement in the LED market in the first quarter,” notes Parvez. “Orders for 2-4” cores have begun to recover somewhat but, given that it is early in the recovery, prices remain low,” he adds. “Our LED customers have substantial inventory of 6” polished wafers, and we expect few orders from that market segment in the quarter.” In the silicon-on-sapphire (SoS) market, demand for large-diameter wafers continues to grow, but this is a smaller market.

For first-quarter 2012, Rubicon expects total revenue to fall further, to $8-12m. Together with further reduced utilization in fabrication and polishing operations, it expects a loss of $0.10-0.14 per share.

“We are increasing our vertical integration by deploying our internally developed raw material processing capability, which we expect will decrease our raw material costs by at least 20% when fully implemented,” notes Parvez. “We are relocating much of our slicing and polishing capacity in Illinois to our new facility in Malaysia, which will be our primary finishing location as the market improves and will provide state-of-the-art capability in a low-cost environment,” he adds.

“We expect capacity utilization among the LED chip makers to continue to improve throughout the first half of this year,” Parvez says. “Looking beyond the first half of 2012, the outlook for sapphire substrates is for very strong growth, as LEDs gain momentum in the general lighting market, where LED penetration presently is only in the single digits, and as LED penetration into the auto market continues and the backlighting market strengthens,” he adds.

“We have continued to maintain high utilization of our crystal growth facilities throughout this slowdown because we are confident that demand will be strong in the second half of 2012 [boosted by the $20m renewed contract for with its main customer for 6” polished wafers],” says Parvez. “The LED industry’s largest potential market, general lighting, is in its infancy, and the more established markets for LEDs such as consumer electronics and the automotive industry have plenty of growth opportunities as well,” he believes.

“The use of large-diameter sapphire substrates is expected to grow significantly in the coming years as LED chip manufacturers continue to look for ways to drive greater efficiency throughout the supply chain,” Parvez continues. “Rubicon continues to be the market leader in terms of capability and cost, and we are well positioned for the market rebound... As pricing and utilization improve, we will gradually move back to our targeted gross margin of over 40%,” he believes.

See related items:

Rubicon’s revenue falls less-than-expected 22% in Q3

Rubicon’s Q2 revenue driven by 62% growth for 6" sapphire

Tags: Rubicon Sapphire substrates

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