27 May 2013

Rubicon’s revenue falls in Q1 as 6” customers reduce inventory

For first-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 $8.3m, down 18.6% on $10.2m a year ago and down 58% on $20m last quarter due to reduced 6-inch wafer orders (as both key 6-inch customers had excess inventory of wafers going into the quarter).

Fiscal	Q1/2012	Q2/2012	Q3/2012	Q4/2012	Q1/2013
Revenue	$10m	$17m	$19.9m	$20m	$8.3m

Given the inventory level, the firm’s largest 6-inch LED customer did not order any additional wafers in Q1. Rubicon’s silicon-on-sapphire (SoS) customer continues to order but at a lower volume. Revenue from 6-inch wafers hence fell from $17.6m last quarter to $6.1m (mostly for SoS).

Optical and R&D revenue fell from $2m last quarter to $1.2m. Optical revenue was level, while R&D revenue was $700,000 lower. “R&D revenue currently comes from our LANCE project, which involves building a unique crystal growth furnace and developing corresponding processes that could produce large-area sapphire windows up to 2-inches thick,” says president & CEO Raja Parvez. “Revenues realized based on our expenditures for that project will vary from period-to-period, primarily based on the timing of equipment purchases.”

When reporting its last-quarter results in February, Rubicon said that, despite the weak pricing environment, it would resume selling 2-4-inch cores in volume in order to reduce its inventory and maintain customer relationships. “Our relationships in the marketplace are still very strong, and Rubicon remains a preferred supplier globally,” says Parvez. “However, most of the orders that we booked were for Q2 delivery,” he adds. Nevertheless, revenue from 2-4-inch core still almost tripled, from $337,000 last quarter to $1m.

Due to the weaker 6-inch orders, factory utilization for wafering operations was about 30%. Crystal growth operations were hence scaled back to 40% utilization in order to begin reducing boule inventory levels. The weaker 6-inch sales and the resulting lower utilization resulted in additional pressure on margins, falling from 5% last quarter.

Most of Rubicon’s inventory is in raw material and boule inventory. With strong orders for 2-4-inch cores and the scale-back in crystal growth operations, boule inventory is now declining. “In addition, our safety stock of raw material is now more than sufficient and our commitments to purchase additional material are complete,” says chief financial officer William Weissman. “So we are now drawing down our raw material stock,” he adds. “As a result, total inventory levels are now declining.”

Operating expenses have been reduced further, from $3.2m a year ago and $3.1m last quarter to $2.9m.Net loss was $3.4m ($0.15 per share, greater than the expected $0.10-0.14), level with a year ago but worsening from $0.05 last quarter. During the quarter, cash, restricted and short-term investments fell from $44m to $36m. Nevertheless, the firm has no debt.

Overall demand from the LED market is improving, driven by increasing adoption of LEDs for general lighting applications, notes Rubicon. “The general illumination market has become the growth driver for the LED industry,” says Parvez. “The sapphire overcapacity that has driven prices to record low levels is gradually being absorbed by the increased demand. We will likely ship 50% more 2-4-inch cores in the second quarter than in any other quarter in our history,” he adds.

“Despite the increased volumes that Rubicon has committed to supply for Q2, pricing for 2-4-inch thus far in the second quarter is up around 10% over the first quarter,” says Weissman. “This is a small dollar amount given the extremely low pricing in the current market, but it is the first time we have seen sapphire prices increase in the past two years, so that is encouraging,” he adds.

“But selling prices remain below our total cost and our utilization rates will remain low in the quarter,” says Parvez. “While the LED market is strengthening and sapphire capacity is being absorbed at a more rapid rate, it will take a while longer for pricing to improve materially,” he cautions. “While we expect another couple of challenging quarters ahead, we expect to see continued improvement in demand and improved pricing for 2-4-inch products.”  

However, pricing of 6-inch wafer is becoming more challenging, says Rubicon. “6-inch wafer orders will remain weak in the second quarter as our customers continue to work down remaining inventory,” notes Parvez. “As a result, we expect second-quarter demand for large-diameter products to be very light, making for a challenging quarter.”

For Q2/2013, Rubicon expects overall revenue of $10-12m, with a loss per share of $0.19-0.23. However, unlike Q1, there should be no cash burn.

“We expect to begin seeing orders improve [for 6-inch wafers] in the second half of the year,” says Parvez. “However, competitors are trying to enter the 6-inch market by offering prices below cost,” says Parvez. “While it is yet to be seen how effectively they will be able to compete given the current limited 6-inch customer base right now, it will likely result in pricing pressure in the near term. We believe we will finally begin to see greater adoption of 6-inch wafers among major LED chip manufacturers within the next year,” he adds.   

“As the 6-inch customer base expands and the general lighting market continues to grow, pricing should become more rational. It is critical in this market environment to continually focus on cost reduction, and we have a number of initiatives underway that will further reduce our already low product costs,” says Parvez.

“We took delivery on additional raw material processing equipment in the first quarter and we’ll be ramping their capability to significantly lower our crystal growth costs. The relocation of the remainder of our polishing production to our Malaysia facility is now complete, which will now result in a significant reduction in our polished wafer costs,” notes Parvez.

“In addition we have several development projects underway that are focused on developing new processes and examining new tools that could enhance our capabilities and reduce costs. We have recruited several highly experienced sapphire polishing subject matter experts to focus exclusively on this process development and also to development disruptive technologies to significantly reduce costs and enhance capability through eliminating process steps.

Also, Rubicon’s SoS customer is projecting strong demand in second-half 2013 as new smartphone models are introduced. “Our customer’s RF technology offers significant advantages over the legacy antenna switch solution, including smaller form factor, less power usage and, most importantly, enhanced performance,” says Parvez. “With the increasing RF complexity required in newer mobile devices, the performance advantages offered by this SoS solution is becoming increasingly important,” he adds. “The expected rapid growth in LTE networks and smartphones should drive strong growth for SoS RF chips as more of these models are introduced. In addition, our SoS customer also continues to work on expanding their content in each smartphone by introducing new products, such as digital tunable capacitors and power amplifiers. SoS as RF chips are also used in wireless infrastructure, broadband, automotive, defense and aerospace applications,” he adds. “So, we believe the SoS market will continue to be a strong market for us in coming years.”

 “We are in the process of extending our vertical integration this year by building out an internal wafer patterning capability and we’ll be introducing large-diameter patterned substrate to the LED market by the end of the year,” says Parvez. “Pattern sapphire substrates (PSS) are now used by many of the top LED chip manufacturers, and an increasing number of chip manufacturers are becoming comfortable outsourcing this process. Today PSS outsourcing has been demonstrated only at a smaller-diameter level. To our knowledge Rubicon will be the first vertically integrated supplier of large-diameter PSS wafer.”  

Compared with $4.6m a year ago, capital expenditure was only $192,000 in Q1, but up on just $120,000 last quarter. But Rubicon expects to spend $10-15m over the rest of the year, including about $7m on building its PSS wafer capability and some of the remainder on enhancing its polishing platform to further reduce wafer costs.

“While the markets we serve have tremendous growth potential, they are evolving and subject to rapid change, which will likely continue to lead to considerable volatility,” Parvez cautions. “However, by focusing on reducing costs and evolving our products through technology, we intend to maintain our market leadership role and position the company to capitalize on market conditions when they later change.”

See related items:

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

Rubicon’s revenue halves to $10m in Q1, but rebound expected in Q2

Tags: Rubicon Sapphire substrates

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